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Should You Buy Tootsie Roll Industries, Inc. (NYSE:TR) For Its Upcoming Dividend In 3 Days?

Simply Wall St

Tootsie Roll Industries, Inc. (NYSE:TR) stock is about to trade ex-dividend in 3 days time. If you purchase the stock on or after the 4th of October, you won't be eligible to receive this dividend, when it is paid on the 17th of October.

Tootsie Roll Industries's next dividend payment will be US$0.09 per share, on the back of last year when the company paid a total of US$0.4 to shareholders. Based on the last year's worth of payments, Tootsie Roll Industries stock has a trailing yield of around 1.0% on the current share price of $37.25. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Tootsie Roll Industries can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Tootsie Roll Industries

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Fortunately Tootsie Roll Industries's payout ratio is modest, at just 40% of profit. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Thankfully its dividend payments took up just 29% of the free cash flow it generated, which is a comfortable payout ratio.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Click here to see how much of its profit Tootsie Roll Industries paid out over the last 12 months.

NYSE:TR Historical Dividend Yield, September 30th 2019

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That explains why we're not overly excited about Tootsie Roll Industries's flat earnings over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run. Recent earnings growth has been limited. However, companies that see their growth slow can often choose to pay out a greater percentage of earnings to shareholders, which could see the dividend continue to rise.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past ten years, Tootsie Roll Industries has increased its dividend at approximately 4.5% a year on average.

To Sum It Up

Has Tootsie Roll Industries got what it takes to maintain its dividend payments? Earnings per share have been flat over this time, but we're intrigued to see that Tootsie Roll Industries is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine strong earnings per share growth with a low payout ratio, and Tootsie Roll Industries is halfway there. It's a promising combination that should mark this company worthy of closer attention.

Want to learn more about Tootsie Roll Industries's dividend performance? Check out this visualisation of its historical revenue and earnings growth.

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.