The Company in a Nutshell
- Between 2013 and 2018, TTC has doubled its dividend.
- Toro is more than 100 years old.
- 72% of its sales are directed to professional usages such as landscape & grounds (43%) and golf (24%).
I must admit, reading about lawn mowers and snow throwers wasn’t exactly how I intended to spend my last Friday afternoon. To my biggest surprise, I found an exciting company in a boring environment. Unfortunately, the hype has been around Toro (TTC) for a while and now shares are still overpriced even if the stock have stagnated since mid 2017. I think it could be a good stock to put on your watch list.
Founded in 1914, The Toro Company was built on a tradition of quality and caring relationships. Today, the company is a leading worldwide provider of innovative solutions for the outdoor environment including turf maintenance, snow and ice management, landscape, rental and specialty construction equipment, and irrigation and outdoor lighting solutions. Through a wide network in 125 countries, TTC offers a wide variety of products such as reel and rotary riding products, trim cutting and walking mowers, greens rollers, turf sprayer equipment, and underground irrigation systems.
Source: June 2018 TTC investors presentation
Toro has many growth vectors in its yard. First, the company systematically buy smaller players in its industry. Toro aims at companies offering professional services around water & technology. Water access and transportation will definitely be a challenge going forward and we think TTC makes a great move to position its business in this sector.
The company has become a pro in cross-selling its products. Through R&D and acquisitions, Toro develop an array of products that goes around the same theme (lawn, garden, snow equipment, irrigation systems) and use their strong brand name to offer those products to customers.
As the company makes the bulk of its sales for professional usage, this generates a solid core of repetitive purchase. The company taking care of a golf will keep investing in Toro’s product year after year to keep its lawn perfect.
Unfortunately, such a great company doesn’t go unnoticed. The stock has surged between 2008 and mid-2017. Such hype finally came down and the stock is “dead money” since then. Even then, TTC trades at a relatively high PE letting us think shares won’t surge anytime soon.
Toro is a consumer cyclical business. We are definitely getting closer to the end of the current economic cycle. This is not good for new shareholders as they may have to wait a while to see the stock go above $70. TTC also makes the bulk of its business in the U.S (76%). An economic slowdown could hurt TTC business. Keep in mind its revenue doesn’t grow as fast as it used to.
Dividend Growth Perspective
TTC shows a small yield with great growth potential. While many dividend investors will discard Toro’s yield under 2%, keep in mind the company has been more than generous in the past 10 years with its shareholders.
After all those hikes, TTC still shows payout ratios under 50%. We think shareholders can expect double-digit dividend growth rate for the next 10 years.
TTC meets our 7 dividend growth investing principles.
As we have previously mentioned, TTC is a great company but we are not the only investors noticing their potential. While TTC hasn’t gone anywhere in the past 18 months, shares are still highly priced in terms of PE ratio.
We don’t think buying it at $60-$70 makes sense right now. We also ran a dividend discount model to see if there is any value for a dividend growth investor. Unfortunately, it is very hard to run such a model with a low yielder. Even with a 12% growth rate for the first 10 years, we can’t get any interesting entry point.
|Input Descriptions for 15-Cell Matrix||INPUTS|
|Enter Recent Annual Dividend Payment:||$0.80|
|Enter Expected Dividend Growth Rate Years 1-10:||12.00%|
|Enter Expected Terminal Dividend Growth Rate:||6.00%|
|Enter Discount Rate:||9.00%|
|Discount Rate (Horizontal)|
|Margin of Safety||8.00%||9.00%||10.00%|
Please read the Dividend Discount Model limitations to fully understand my calculations.
We definitely do not think the stock will drop below $50 anytime soon. However, you may identify a good entry point around $50-$55. It would still be shown as “overpriced” according to this model. Keep in mind that this is a low yielding stock with great price appreciation potential. There is a price for quality!
The need for water has been a growing topic of discussion as of lately. Toro offers great irrigation systems and this presents about 18% of its business. Toro enjoys a strong brand recognition. If you look at their ratings at Home Depot or Amazon, you’ll notice the company makes products consumers love. Toro uses their name to cross-sell many products that can be used together to make your lawn even greener. The company doesn’t only grow internally, but management is always hunting for great deals in their industry. Finally, since over 70% of its business comes from professional usages, Toro counts on a solid customer base with repeat purchases year after year.
Just put TTC on your watch list and wait for the perfect timing to buy some shares.
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Disclaimer: We do not hold TTC in our Dividend Stocks Rock portfolios.
Featured Image Source: Pixabay