Updated on May 16th, 2024 by Bob Ciura
The Dividend Aristocrats are a group of 68 companies in the S&P 500 Index, with 25+ consecutive years of dividend increases. Broadly speaking, they are among the highest-quality dividend growth investments in the entire stock market.
You can see a full downloadable spreadsheet of all 68 Dividend Aristocrats, along with several important financial metrics such as price-to-earnings ratios, by clicking on the link below:
Disclaimer: Sure Dividend is not affiliated with S&P Global in any way. S&P Global owns and maintains The Dividend Aristocrats Index. The information in this article and downloadable spreadsheet is based on Sure Dividend’s own review, summary, and analysis of the S&P 500 Dividend Aristocrats ETF (NOBL) and other sources, and is meant to help individual investors better understand this ETF and the index upon which it is based. None of the information in this article or spreadsheet is official data from S&P Global. Consult S&P Global for official information.
This update will cover food distributor Sysco (SYY). Sysco has a long history of steady dividends and regular dividend increases. It has paid a dividend every quarter since it went public in 1970.
Sysco has many attractive qualities as a dividend growth stock. It is the largest company in its industry, which provides it with higher profit margins and durable competitive advantages over its smaller rivals.
It also has growth potential, and the ability to increase its dividend each year.
Business Overview
Sysco was founded in 1969 and went public the following year. The company has grown steadily over the nearly five decades since.
Today, Sysco is the largest food distributor in the U.S. It distributes products including fresh and frozen foods, as well as dairy and beverage products. It also provides non-food products including tableware, cookware, restaurant and kitchen supplies, and cleaning supplies.
Source: Investor Presentation
The company has a wide range of customers, which include restaurants, healthcare facilities, education, government offices, travel, leisure, and retail businesses. It also has a large segment of other customer types such as bakeries, churches, civic and fraternal organizations, vending distributors, and international exports.
In all, Sysco has approximately 600,000 customers. Its position atop the food distribution industry provides Sysco with high-profit margins and future growth potential.
Growth Prospects
On April 30th, 2024, Sysco reported third-quarter results for Fiscal Year (FY) 2024. The company demonstrated significant growth across key metrics compared to the same period in fiscal year 2023.
With sales rising by 2.7% to $19.4 billion and gross profit surging by 5.2% to $3.6 billion, Sysco showcased its resilience and adaptability amidst a challenging economic environment.
Sysco has grown earnings by 3.9% annually over the past five years and earnings growth of 9.6% over the past nine years. Earnings were growing nicely until the COVID-19 pandemic, which caused FY2020 and FY2021 earnings to decrease. Through acquisitions and more recently, the company growth organically, with share buybacks, has increased earnings.
Tax cuts and share buybacks have accelerated earnings growth in recent years, but this level of growth will not be permanent. The company is also in the process of cutting overhead costs, which should mildly boost bottom-line growth. We anticipate 7.0% earnings growth over the next five years.
Competitive Advantages & Recession Performance
The U.S. foodservice industry is fiercely competitive. There are thousands of competitors to Sysco, which include other food distributors, as well as wholesale or retail outlets, grocery stores, and online retailers. Sysco also faces the risk of its customers negotiating directly with its suppliers.
However, what has kept competitors at bay for so many years, is that Sysco is the largest operator in the industry. It controls about 16% of the U.S. foodservice industry. Sysco operates over 300 distribution facilities worldwide and serves over 600,000 customer locations. Such a huge presence allows Sysco to keep costs low, ant it can pass on the benefit to its customers.
Another benefit of Sysco’s business model is that it is resistant to recessions. Everyone has to eat, which gives Sysco a certain level of demand, regardless of the condition of the U.S. economy.
This is why Sysco’s profits held up well during the Great Recession:
- 2007 earnings-per-share of $1.60
- 2008 earnings-per-share of $1.81 (13% increase)
- 2009 earnings-per-share of $1.77 (2% decline)
- 2010 earnings-per-share of $1.99 (12% increase)
Sysco grew earnings-per-share at a double-digit pace in 2008 and 2010, with only a mild dip in 2009. The company grew earnings from 2007 to 2010, which was a rare achievement.
Sysco’s stable industry and top competitive position allowed it to raise its dividend each year, even during recessions.
Valuation & Expected Returns
We expect the company will earn $4.30 per share for FY2024. Based on this, the stock has a price-to-earnings ratio of 17.8. Our fair value estimate is a price-to-earnings ratio of 20, which implies that the stock is currently trading below fair value.
Because Sysco is an undervalued stock, annual returns could be increased by 2.4% per year if the P/E multiple increases to 20 over the next five years.
Fortunately, Sysco does not need to rely on multiple expansion for generating strong total returns, as the company has an attractive growth profile and dividend. We expect Sysco to deliver up to 7% annual earnings growth going forward, consisting of organic growth, acquisitions, and share repurchases.
In addition, Sysco has a current dividend yield of 2.7%, which is a higher yield than the average yield of the broader S&P 500 Index. This leads to total expected annualized returns of 12.1% per year over the next five years. This is a strong expected rate of return, making the stock a Buy.
Sysco should have little trouble increasing its dividend going forward. The company has a projected dividend payout ratio of 47% for fiscal 2024. This indicates the dividend is more than sufficiently covered.
Final Thoughts
Sysco operates at the top of a stable industry. It has an entrenched industry position and should see steady demand, even during recessions. These qualities make Sysco a reliable stock for income.
Sysco is also on the exclusive list of Dividend Kings, a group of stocks with 50+ consecutive years of dividend increases.
The stock appears undervalued, meaning that right now is likely a good time to buy the stock. We believe future returns will be quite satisfactory for investors buying the stock at the current valuation level.
While returns will likely be boosted by an expanding valuation multiple, they will primarily be driven through earnings growth and dividends. As a result, we rate SYY stock a buy at the current price.
If you are interested in finding more high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:
- The 20 Highest Yielding Dividend Aristocrats
- The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of 54 stocks with 50+ years of consecutive dividend increases.
- The 20 Highest Yielding Dividend Kings
- The Dividend Achievers List: a group of stocks with 10+ years of consecutive dividend increases.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500. - The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.
- The Monthly Dividend Stocks List: contains stocks that pay dividends each month, for 12 payments per year.
- The 20 Highest Yielding Monthly Dividend Stocks
- The High Dividend Stocks List: high dividend stocks are suited for investors that need income now (as opposed to growth later) by listing stocks with 5%+ dividend yields.
The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly: