Unlocking a Hidden Gem: A Top Dividend Growth Stock
Toro, a leader in the outdoor and infrastructure industries, has a clear purpose: to help customers enhance the beauty, productivity, and sustainability of the land. With a strong presence in multiple markets, including mowers, turf maintenance, irrigation, and snow and ice management, Toro has delivered impressive total returns of 4,930% since 2000, outperforming the S&P 500.
A Temporary Setback Creates an Opportunity
Despite its success, Toro’s sales and net income have declined over the past two years, causing the stock to drop 30% from its all-time highs. However, this dip has resulted in a rare buying opportunity, with the shares trading at their most reasonable valuation in nearly a decade and the dividend yield reaching a 10-year high of 1.7%.
Essential Products for a Resilient Business
Toro’s motto, “Grass grows, snow falls, and infrastructure ages,” highlights the essential nature of its products. With a diverse range of non-discretionary items spanning multiple end markets, Toro’s operations are remarkably steady, resulting in a 5-year beta of 0.7. This stability is backed by the company’s ability to generate consistent sales across various markets.
End Markets: A Breakdown
Toro’s largest end market, professional turf equipment, has faced challenges due to higher interest rates and consumer spending uncertainty. However, with most products having a typical replacement cycle of three to five years, the segment is poised for a rebound. The company’s underground construction equipment, driven by megatrends like broadband and data center buildouts, has become a growth segment, with a book-to-bill ratio exceeding 1. The golf equipment and irrigation unit, where Toro holds a dominant 50% market share, provides a steady flow of sales. Lastly, the residential sales segment has seen accelerating growth following a partnership with Lowe’s Companies.
Financial Strength and Dividend Yield
Toro boasts substantial net profit and free-cash-flow margins, averaging 9% over the last decade. These margins provide ample funding for mergers and acquisitions, stock buybacks, and dividend payment increases. The company’s payout ratio of 37% supports the sustainability of its elevated dividend yield.
A Once-in-a-Decade Buying Opportunity
With Toro’s price-to-sales ratio 20% below its 10-year average, the company presents an attractive valuation. Coupled with its highest dividend yield in 10 years, Toro is an excellent bedrock holding to buy at a discounted price. Management’s focus on creating $100 million in annual cost savings by 2027 further supports the company’s rebound potential.
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