A Foolish Treat
Tootsie Roll

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By Paul Larson (TMF Parlay)
October 24, 2000

Trading at $38 11/16 as of October 23, 2000

What better time to take a look at Tootsie Roll (NYSE: TR) than on the holiday that, for millions of kids, revolves around candy? I'm not merely running with the Halloween theme by dropping Tootsie Roll into your bag of stock ideas. I find Tootsie Roll to be one of the most reliable and rock-solid companies I have ever owned. Here's why I like it:

Consistent profitability
You won't find many companies with the amazing financial history that Tootsie Roll boasts. Through the end of 1999, Tootsie Roll has achieved these milestones, which I love to quote:

• 23 straight years of sales growth
• 18 straight years of net income growth
• 35 straight years in which the company has paid a 3% stock dividend
• 57 straight years in which the company has also paid a cash dividend

Pretty amazing, no? Tootsie Roll has grown its profits every single year since Reagan first took office, and it has paid a dividend every year since World War II. Those who bought and held the stock for decades have been very handsomely rewarded for owning a chunk of an American candy icon.

Growth is on-track
Through the first six months of the year, Tootsie Roll has continued to roll along with moderate and consistent growth. Take a look at these results for the year-to-date as of July 1:

(millions)                2000          1999
Net Sales                $168.4        $162.5 
Net Earnings              $28.7         $27.1
EPS                       $0.58         $0.53 
Shares Outstanding         49.6          50.7

These are exactly the types of results longtime Tootsie Roll shareholders have come to expect. Namely, modest top- and bottom-line growth with net margins in the high teens. Value investors should also be interested to learn that Tootsie Roll's return on assets and return on equity is also consistently in the mid-to-upper teens, easily beating the firm's cost of capital.

A cash-generating machine
As you might guess, Tootsie Roll is a mature company, generating copious amounts of free cash flow. This allows it to be totally self-sufficient and free of outside financing. Tootsie Roll is essentially debt-free and has $162 million (about $3.28 per share) in cash and investments.

Tootsie Roll has been putting its free cash flow to good use over the years in a simple but effective recipe for increasing shareholder value. First, it has been buying other candy companies over the years, recently paying just under $75 million in cash for Andes Candies and another small confectionary firm. By paying cash for its acquisitions, Tootsie Roll has been able to keep shareholder dilution to a minimum.

Beyond the cash dividends Tootsie has been paying out for six decades, the company has also been paying shareholders an annual 3% stock dividend every April. This means that an investor who holds 100 shares in March will then own 103 shares in May. When the following year rolls around, those 103 shares will turn into 106 shares and some extra cash for the fractional shares. It's basically a built-in dividend reinvestment plan that allows longtime shareholders to accumulate a significant number of shares over time.

In a vacuum, share dividends -- just like stock splits -- increases the number of shares outstanding in a company. Tootsie Roll has been able to counteract this effect by repurchasing shares of the company on the open market. The past several years, it has repurchased more shares than it has issued through dividends, causing the number of shares outstanding to actually decrease. This means that longtime shareholders have seen their percentage ownership of the company rise dramatically over the years.

Quite simply, when you mix cash dividends, share dividends, company share repurchases, and rising net income, it is a surefire formula for shareholders to see compound returns over the years.

A winning turtle
Tootsie Roll is a company that had an attractive and profitable product lineup a hundred years ago, and Tootsie Rolls are likely to still be around in another hundred years. In an economy that sees companies rise and fall from grace in a matter of months, I like the consistency that Tootsie Roll's recipe for success has brought.

Sales growth over the next five years should be between 5% and 10% annually, and EPS growth should be between 10% and 15%. Of course, what you do get in predictability from Tootsie Roll you give up in potential "shoot the lights out" performance. But remember, it was the turtle that won the long-term race, not the hare.

A Trick or Treat represents the opinion of one Fool and in no way should be taken as the opinion of either the Motley Fool, Inc., the company in question, or representative of anyone or anything other than that specific Fool's thoughts.

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