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Dividend Aristocrats In Focus Part 45: Sysco


Updated on January 8th, 2020 by Samuel Smith

The Dividend Aristocrats are a group of 57 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 57 Dividend Aristocrats, along with several important financial metrics such as price-to-earnings ratios, by clicking on the link below:

 

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. Its most recent increase was a 15.4% raise in November 2019. The company’s dividend is also very safe.

Sysco stock has performed well in the past year, up ~39% including dividends. It has outperformed the broader S&P 500 Index over the past 12 months. Sysco has enjoyed a resurgence, capitalizing on economic growth and strong consumer confidence.

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. In its first year as a publicly-traded company, it had sales of just $115 million. The company has grown steadily over the nearly five decades since. Last year, Sysco had sales of more than $60 billion.

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.

The company has a wide range of customers, which include restaurants, healthcare facilities, education and 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

The operating climate for Sysco was challenged in 2017, due to the “restaurant recession” that took place in the United States. Restaurant traffic slowed down, driven by several factors including eroding mall traffic, and low grocery prices.

Fortunately, Sysco cut costs in its U.S. business to protect its profit margins. And the company has enjoyed a resurgence in recent years, driven by a strong U.S. economy and high consumer confidence. Sysco now expects at least 4% annual sales growth and up to 12% annual EPS growth through 2020.

Sysco reported its first quarter (fiscal 2020) earnings results on November 4th, 2019. Revenue grew by 0.6% year-over-year, gross profit increased 1.4%, and adjusted earnings per share increased by 8.2%. The primary headwind this quarter was foreign exchange rates.

Although international operations showed a resumption of growth and exceeded the U.S. operations’ growth rate, most of that growth this quarter was given up due to weakening foreign currencies.


Source: Investor Presentation

Sysco has increasingly utilized acquisitions to drive growth in recent years. In 2016, Sysco acquired U.K.-based Brakes Group for $3.1 billion.

Brakes is one of the largest foodservice companies in Europe. It serves fresh, refrigerated, and frozen foods to over 50,000 customers, and has a leading presence in the U.K., France, Sweden, Ireland, Belgium, Spain, and Luxembourg.

In late January of last year (1/28/19), Sysco announced the acquisition of Waugh Foods, Inc., a food distributor with approximately $40 million of sales. Continued acquisitions such as this help Sysco generate growth in a fairly saturated–and highly competitive–food distribution industry.

Acquisitions such as these are key to Sysco’s growth strategy.

Source: Investor Presentation

The combination of organic sales growth, acquisition-added revenue growth, and share repurchases is expected to result in ~7% annual earnings-per-share growth, in our view. We believe this is an attainable goal, due to the company’s strong business model and impressive competitive advantages.

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 $280 billion U.S. foodservice industry. Sysco operates 330 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:

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

Sysco is expected to produce adjusted earnings-per-share of $3.82 in fiscal 2020. Based on this, the stock has a price-to-earnings ratio of 22.0. Our fair value estimate is a price-to-earnings ratio of 18.0, which means the stock is currently trading well in excess of fair value.

Because Sysco is an overvalued stock, we do not anticipate multiple expansion being a meaningful driver of future shareholder returns. Instead, shareholder returns will be generated by earnings growth and dividends.

Fortunately, Sysco does not need to rely on multiple expansion, 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 2.1%, which is a higher yield than the average yield of the broader S&P 500 Index. This leads to total expected annualized returns of ~6% per year over the next five years. While Sysco is somewhat overvalued, it offers a more than satisfactory expected rate of return.

Sysco should have little trouble increasing its dividend going forward. The company had a dividend payout ratio of 43% in fiscal 2019. This indicates the dividend is more than sufficiently covered, with room for future dividend increases.

Final Thoughts

Sysco operates at the top of a stable industry. It is highly profitable, and should see steady demand, even during recessions. These qualities make Sysco a reliable stock for annual dividend increases.

The stock is slightly overvalued, meaning right now is not the best time to buy the stock. Sysco shares are currently sitting at an all-time high. We believe future returns will be satisfactory, but not spectacular, for investors buying the stock at the current valuation level.

Still, we believe the stock can generate positive returns even at this valuation, through earnings growth and dividends. As a result, Sysco remains a quality holding within a dividend growth portfolio, but the stock is not a buy at the current price.

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