Dividend kings, stocks with 50+ consecutive years of dividend growth, are a rare and prized collection of generally low risk income growth investments.
Many of these companies have established leadership positions in the markets they serve through some combination of economies of scale, intellectual property, and customer relationships.
In the case of Tootsie Roll (TR), the company has increased its dividend for 51 consecutive years thanks largely to its portfolio of popular candy brands.
Given Warren Buffett’s affection for popular food brands in his dividend portfolio here, let’s take a closer look at Tootsie Roll to see if this dividend king could be an appealing long-term investment.
Business Overview
Founded in 1896 by Leo Hirschfield in Chicago, Illinois, Tootsie Roll is the maker of famous candy brands as Tootsie Roll, Tootsie Pops, Child’s Play, Caramel Apple Pops, Charms, Blow-Pop, Junior Mints, Charleston Chew, Sugar Daddy, Sugar Babies, Andes, Razzles, and Dubble Bubble.
Source: Tootsie Roll Annual Report
It sells its products primarily through 30 candy and grocery brokers to over 4,000 supermarkets, variety stores, dollar stores, chain grocers, and drug chains in the US, as well as numerous outlets in Canada and Mexico, which are its largest foreign markets.
The company also sells in Europe, the Middle East, and Asia, but the US is its largest market, accounting for roughly 92% of total product revenue.
Business Analysis
Tootsie Roll’s large portfolio of well-known brands generally means that its sales are steady in all types of economic environments, which is important for a company that has become famous for clockwork-like annual dividend increases.
That being said, like most food companies, Tootsie Roll isn’t a fast-growing company. In fact, sales peaked in 2012 and have been gradually declining ever since.
Source: Simply Safe Dividends
Fortunately, management has proven effective at maximizing the company’s economies of scale and cutting costs in recent years.
In fact, thanks to its specialized, high-speed equipment, and highly automated manufacturing facilities, the company has been able to generate steady improvements in margins and returns on shareholder capital.
This is courtesy of the company launching its “enterprise resource planning” system, or ERP, in 2011. This corporate turnaround plan was based on using advanced analytics to help managers streamline and maximize the flexibility of the company’s manufacturing systems and supply chain.
In fact, today Tootsie Roll enjoys some of the industry’s highest profitability.
Sources: Morningstar, and Gurufocus
Going forward the company has four opportunities to stabilize and return to moderate sales growth. The first is launching new product lines such as Cella Dips (chocolate covered whole dried cherries) and caramel marshmallow Sugar Babies.
The second is increased distributions of existing products, especially in emerging markets such as India and China, where a fast-growing middle class could fuel a large increase in per capita candy consumption.
Third, the company is revamping its advertising budget away from more traditional routes, such as TV and print, and towards a greater focus on social media, such as Twitter, Facebook, and Instagram.
This shift is intended to increase its brand awareness and popularity with Millennials and America’s youth market.
And finally, the company can continue to grow through acquisitions as it has over the past 120 years, when it purchased such well-known brands as Andes, Dubble Bubble, Junior Mints, and Dots.
Key Risks
While Tootsie Roll’s status as a dividend king is worthy of respect, there are nonetheless several major risks to owning this stock.
