Updated on April 6th, 2021 by Bob Ciura
The Dividend Aristocrats are a group of 65 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 65 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.
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.
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.
The operating climate for Sysco was challenged over the past year, as the coronavirus pandemic forced closures of restaurants and other dining venues that make up Sysco’s customer base.
Fortunately, Sysco remained profitable in 2020, and hopes to see a more significant recovery in 2021. On February 2nd, 2021, Sysco reported second quarter Fiscal Year (FY) 2021 results. Sales fell by 23% for the quarter, while gross profit declined by 26% year-over-year. For the first half of FY 2021, sales fell 23% while gross profit declined 25%. Over the first six months of the fiscal year, earnings-per-share declined 65%.
As restaurants and other dining establishments open up, investors are hoping that Sysco will continue to see its sales and profit gradually increase.
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 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
While the coronavirus pandemic has had a huge impact on Sysco, we believe the company has normalized earnings power of $2.90 per share. Based on this, the stock has a price-to-earnings ratio of 28.1. Our fair value estimate is a price-to-earnings ratio of 20, which means the stock is currently trading well in excess of fair value.
Because Sysco is an overvalued stock, annual returns could be reduced by 6.6% per year if the P/E multiple declines to 20 over the next five years. 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 2.3%, which is a higher yield than the average yield of the broader S&P 500 Index. This leads to total expected annualized returns of 2.7% per year over the next five years. This is a weak expected rate of return, making the stock a sell on valuation concerns.
Sysco should have little trouble increasing its dividend going forward. The company has a projected dividend payout ratio of 62% for fiscal 2021. This indicates the dividend is more than sufficiently covered.
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 on the exclusive list of Dividend Kings, a group of stocks with 50+ consecutive years of dividend increases.
The stock is 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.