Toro Co. (NYSE:TTC) Screens as a Quality Dividend Stock with Strong Profitability and Sustainable Growth

When evaluating dividend-paying stocks, investors often look beyond just high yields to ensure sustainable income and capital preservation. A complete approach involves screening for companies with strong dividend characteristics while maintaining solid profitability and financial health. This method helps identify firms able to maintain and grow their dividends over time, rather than those offering high yields due to underlying business weaknesses or unsustainable payout ratios. The Toro Co. (NYSE:TTC) emerges from such a screening process as a candidate worthy of closer examination by income-focused investors.

Dividend Sustainability and Growth

Toro shows several characteristics that dividend investors typically seek. The company maintains a dividend yield of 1.89%, which exceeds the industry average of 1.78% and places it in the top quartile among machinery sector peers. More importantly, Toro has established a reliable track record of dividend payments spanning at least ten years without reductions, providing confidence in its commitment to returning capital to shareholders.

The company's dividend growth story appears particularly strong:

• Average annual dividend growth of 9.97% over recent years
• Sustainable payout ratio of 37.79% of earnings
• Consistent dividend increases demonstrating management's confidence

These factors align with the screening methodology's emphasis on identifying companies with not just current income potential, but also the capacity for future dividend growth. The moderate payout ratio indicates Toro retains sufficient earnings to reinvest in business growth while rewarding shareholders, reducing the risk of future dividend cuts that often plague companies with higher payout ratios.

Profitability Strength

Toro's operational performance provides the foundation for its dividend capabilities. The company achieves strong profitability metrics that exceed industry norms:

• Return on equity of 27.01%, outperforming 93% of industry peers
• Return on invested capital of 15.50%, exceeding 89% of competitors
• Stable profit margins of 8.77% that rank above two-thirds of the industry

These profitability measures directly support the screening criteria's focus on companies with sufficient earnings power to maintain dividend payments. High returns on capital indicate efficient use of shareholder funds, while consistent margins suggest pricing power and operational stability, both crucial for sustaining dividend distributions through economic cycles.

Financial Health Considerations

While Toro's overall financial health shows some mixed signals, it meets the screening threshold for acceptable financial stability. The company maintains a solid Altman-Z score of 4.51, indicating low bankruptcy risk and outperforming 74% of industry competitors. Debt management appears reasonable with a debt-to-free-cash-flow ratio of 2.41, suggesting the company could repay its obligations within a manageable timeframe.

However, investors should note some areas requiring monitoring:

• Current ratio of 1.81 trails 60% of industry peers
• Quick ratio of 0.79 falls in the lower quartile of the sector
• Debt-to-equity ratio of 0.73 indicates moderate leverage

These liquidity metrics, while meeting the screening minimums, suggest Toro operates with tighter working capital management than some competitors. The screening methodology intentionally sets health rating thresholds that exclude financially distressed companies while allowing for those with manageable leverage, recognizing that some debt can enhance returns when used prudently.

Valuation Context

Toro's valuation presents a balanced picture for dividend investors. Trading at a forward P/E ratio of 17.43, the company appears reasonably valued compared to both the industry average and broader market multiples. The stock trades at a discount to approximately 68% of industry peers based on forward earnings estimates, potentially offering value relative to sector competitors.

The complete fundamental analysis report provides additional detail on these valuation metrics and their comparison to industry and market benchmarks.

Investment Considerations

For dividend investors, Toro represents a potential candidate that balances income generation with quality business characteristics. The company's strong profitability provides confidence in its ability to maintain payments, while its dividend growth history suggests potential for increasing income over time. The reasonable valuation reduces the risk of multiple compression eroding total returns, and the company's market position in outdoor maintenance equipment provides some defensive characteristics during economic downturns.

However, investors should consider the company's moderate liquidity position and recognize that the current yield, while above industry average, may not satisfy those seeking high immediate income. The screening methodology intentionally prioritizes sustainable dividend characteristics over maximum yield, seeking companies less likely to cut distributions during challenging periods.

For investors interested in exploring similar dividend opportunities, additional screening results are available through the Best Dividend Stocks screener, which identifies companies meeting similar criteria for dividend quality, profitability, and financial health.

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Disclaimer: This analysis is provided for informational purposes only and does not constitute investment advice, financial guidance, or a recommendation to buy or sell any security. Investors should conduct their own research and consult with a qualified financial advisor before making investment decisions. Past performance does not guarantee future results, and dividend payments are subject to company discretion and business conditions.