Stocks Fools Love
Tootsie Roll Industries Inc.

By Paul Larson (TMF Parlay)
February 8, 2000

Trading at $32 3/8 as of February 7, 2000

Chances are the average Fool knows and has used at least one of Tootsie Roll's products. Whether it be the company's namesake candy or Tootsie Pops or Junior Mints, Tootsie Roll Industries is a veritable candy institution and American icon.

Just how many licks does it take to get to the center of why I think Tootsie Roll is a solid investment? Let's see...

Rock-solid historical financials

Quite simply, you will have an exceedingly difficult task finding a company with as solid and impressive historical financial results as Tootsie Roll. If Tootsie meets the consensus expectations when the books are closed for 1999, the company will have achieved these amazing financial milestones:

  • 23 straight years of sales growth
  • 18 straight years of net income growth
  • 35 straight years the company has paid a 3% stock dividend
  • 57 straight years the company has also paid a cash dividend
Just sit back and ponder the above facts for a moment. It's hard enough these days to find a company that has more than a handful of years of profitability, and yet here we have Tootsie Roll, which has grown its bottom line every single year since today's college freshmen were newborns.

Much of the same expected in the future

While past results are no guarantee of future results, I think it's not much of a stretch to say that things at Tootsie will not change dramatically in the foreseeable future. The candy industry is a fairly mature and static one, and there is really nothing on the horizon that should alter Tootsie's positioning in its markets. Where some companies have wildly unpredictable futures, the investment predictability of Tootsie is extremely high.

Tootsie is a finely tuned cash flow machine

Looking at Tootsie from a value investor's standpoint, Tootsie rocks. In the most recent quarter, Tootsie achieved the following margins:

Gross Margin 50.9%
Operating Margin 30.0%
Net Margin 19.1%

Any way you slice it, these are fairly impressive profit margins coming from what is essentially a food company. Furthermore, the company's return on assets and return on equity is consistently in the mid- to upper-teens, easily beating the firm's cost of capital. It's also worth noting that Tootsie really doesn't need any external financing since the cash being generated is more than enough to sustain and grow the business. Either way, let's just say that Tootsie has a highly efficient business that has a watchful eye on costs and prudently uses its assets.

The company also generates significant amounts of free cash flow from its operations. The result is a company that is essentially debt-free and cash-rich. Tootsie has $61.0 million worth of cash and equivalents on its balance sheet (about $1.25 per share) plus another $144.8 million (about $2.36 per share) in short- and long-term investments. It's worth noting that this cash has piled up even though Tootsie has been paying out dividends for years and has also been buying back stock.

Interesting dividends

Let's first talk about dividends since they are a bit different with Tootsie Roll. The company does pay a cash dividend, and the current yield on the stock is 0.8%. With a 57-year history of paying a dividend, it's a fairly safe bet that the cash dividend will continue to grow.

The other part of the dividend equation is the regular stock dividend the company has been paying for decades. Every April since the mid-1960s, Tootsie has paid out a 3% stock dividend. Meaning, the company gives its shareholders additional shares every year. If one held 100 shares before the dividend, after the 3% stock dividend they would hold 103 shares. Think of it as a kind of built-in dividend reinvestment plan.

I'm sure some of you sharper Fools out there may pipe up that all this stock dividend does is increase the number of shares outstanding in the company, similar to what stock splits do. However, Tootsie has been able to pay this stock dividend while keeping its share count essentially flat thanks to the fact that it has been generously repurchasing and retiring shares from the open market. If the company can continue to grow its net income while reducing its outstanding shares, current owners of Tootsie Roll will see the value of their shares compound quite impressively over the years.

A solid company

Make no mistake, Tootsie is not for the get-rich-quick crowd. It is just an extremely solid company with modestly bright prospects ahead of it. Sales growth over the next five years should be between 5% and 10% annually, and EPS growth should be between 10% and 15%. For value investors with the inclination to hold over the long haul, I think owning the shares will be as sweet as licking a Tootsie Pop.

Next: Cisco Systems »

Tootsie Roll Company Information:
Trades on the NYSE under the symbol TR
Website: www.tootsie.com

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"Hershey vs. Tootsie Roll" -- 10/26/99
Industry Focus 2000 $

A Stock to Love 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 else other than that specific Fool's thoughts.

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