Rare Decade-Long Chance: Remarkable Dividend Share Dropping by 30% For Immediate Purchase
Toro Corporation (TTC), holding a 1.73% share, declares its mission as "aiding our customers in enhancing the aesthetics, productivity, and sustainability of the land." Its product range spans from lawnmowers and lawn maintenance equipment to irrigation solutions, underground construction machinery, and snow and ice management tools.
Commanding either the No. 1 or No. 2 market share in most of its product categories, Toro has garnered staggering total returns of 4,930% since 2000, surpassing the S&P 500's returns of 560% within the same timeframe.
However, over the past two years, Toro's sales experienced a 1% decrease, resulting in a 10% slide in its net income. This led to a 30% dip in its stock price, which now trades at its most reasonable valuation in nearly a decade, with their dividend yield surging to a 10-year high of 1.7%.
Given these circumstances, this presents an auspicious opportunity to consider investing in this promising dividend growth stock.
So, what's happening with Toro lately?
Toro often uses the phrase, "Grass grows, snow falls, and infrastructure ages," to accentuate the appeal of its essential products for potential investors. The company's consistent operations underscore this, evidenced by its 5-year beta of 0.7 for the stock, indicating that Toro's stock is less tumultuous than most, making it a stable investment.
Now, let's delve into the end-markets that provide Toro its resilience over the long-term:
1. Landscape and grounds (37% of sales)
Toro's largest end-market is experiencing pressure due to contractors and homeowners limiting big-ticket purchases due to escalating interest rates and consumer spending uncertainties. This segment primarily depends on Toro's dealer network and is edging closer to recovery, with the company near 80% of its pre-pandemic field inventory levels.
Cyclic inventory fluctuations, such as these, will be inevitable in Toro's stock. Nevertheless, as most of its products have a typical replacement cycle of 3 to 5 years, these imbalances tend to normalize in the long run. Toro's equipment is trusted by some of the world's most prestigious fields, such as Manchester United's Old Trafford pitch, which ensures its products remain top-notch.
2. Underground and specialty construction (23% of sales)
Megatrends supporting this end-market, including broadband and data center buildouts, energy grid updates, transportation infrastructure redevelopments, and water quality and utility upgrades, propel demand for underground equipment. Toro's underground equipment segment, like Ditch Witch vacuum excavators, has become its fastest-growing segment.
As per Toro's most recent quarter, the book-to-bill ratio for these segments exceeded 1, suggesting that demand outpaced its manufacturing capabilities, resulting in a sizable backlog.
3. Golf (17% of sales)
Toro boasts a dominant 50% market share in the golf equipment and irrigation niche, making it the only company to offer both products. This segment is relatively stable, typically leasing out its golf equipment for 3-year periods, ensuring a steady sales flow. Toro serves several famous golf courses worldwide, including St. Andrews Links in Scotland, and continually innovates to preserve its market dominance.
4. Residential (19% of sales)
Toro has seen accelerated residential sales growth, thanks to a partnership with home improvement giant Lowe's Companies. Similar to the contractor side of its business, this segment is more susceptible to broader economic conditions but is expected to gain resilience due to Lowe's expansive reach.
Superior profitability and a once-in-a-decade valuation
Toro's handsome net profit and free-cash-flow margins averaged 9% over the last decade, allowing ample funding for mergers, acquisitions, stock buybacks, and dividend payment enhancements. Following the stock's 30% decline, its 1.7% dividend yield now sits near a 10-year peak.
Maintaining a payout ratio of only 37%, this attractively high dividend yield appears sustainable and has grown at an annual rate of 16% since 2014.
Additionally, Toro's low price-to-sales (P/S) ratio of 1.9, roughly 20% below its 10-year average, further supports the notion that the company is trading at a once-in-a-decade discount.
This blend of a low valuation and Toro's highest dividend yield in 10 years positions the company as an outstanding foundation stock to buy at a once-in-a-decade price. With management determined to achieve $100 million in annual cost savings by 2027, Toro seems like a top-tier recovery candidate for patient investors.
In light of Toro's recent stock price dip and a 10-year high dividend yield, this situation could be an excellent opportunity for those interested in dividend investing in finance. With Toro's consistent operations and strong presence in various markets, such as landscape and grounds, underground and specialty construction, golf, and residential sectors, there's potential for steady returns.
Given Toro's stable financial performance with high net profit and free-cash-flow margins, its attractive dividend yield, and a low price-to-sales ratio, it may be an appealing investment choice for individuals looking to diversify their money portfolios in the realm of money management and investing.
