Dividend Aristocrats in Focus Part 40: Sysco - Sure Dividend Sure Dividend

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Dividend Aristocrats in Focus Part 40: Sysco


Updated on February 12th, 2019 by Bob Ciura

The Dividend Aristocrats are a group of 57 companies in the S&P 500 Index, with 25+ consecutive years of dividend increases.

 

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. Over those 48 years, it has increased the dividend 50 times. Its most recent increase was an 8% raise in November 2018.

Sysco stock has performed well in the past year, up 6.5% excluding dividends. It has more than doubled the return of 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 high profit margins and durable competitive advantages. 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 $58 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:

The ‘other’ category includes 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 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 quarters, 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.

SYY Growth

Source: Investor Presentation

Sysco reported its second quarter (fiscal 2019) earnings results on February 4th. Revenue of $14.77 billion for the quarter increased 2.5% from the same quarter last year. Management explained that consumer confidence remained strong during the most recent quarter, despite the volatility in the financial markets during the last couple of months.

Strong consumer confidence has a positive impact on restaurant sales, which, in turn, is a positive for Sysco’s ability to sell to its customers. Sysco grew its sales by 4% in the United States. The International segment was a bit weaker, as sales rose by just 0.8% outside of the U.S.

Sysco increased its gross profits by 2.7% last quarter, which, combined with some operating leverage, allowed for a 4.8% increase in the company’s operating profits. Sysco’s earnings-per-share totaled $0.75 during the second quarter, which was $0.02 more than what the analyst community had forecast.

Over the first half of the current fiscal year, Sysco generated free cash flow of $701 million, up 3% from the first half of fiscal 2018. Adjusted earnings-per-share increased 9.2% over the first two fiscal quarters.

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

SYY Brakes

Source: Barclays Consumer Staples Conference, page 11

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 (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.

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 $3.61 in fiscal 2019. Based on this, the stock has a price-to-earnings ratio of 18.5. Our fair value estimate is also a price-to-earnings ratio of 18.5, which means the stock is currently trading right at fair value.

Because Sysco is a fairly valued 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 2.4%, which is a higher yield than the average yield of the broader S&P 500 Index.

This leads to total expected returns of 9.4% per year over the next five years. While Sysco is not a deeply undervalued stock, 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 44% in fiscal 2018. 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 not significantly undervalued, but can still generate returns through earnings growth and dividends. As a result, Sysco remains a quality holding within a dividend growth portfolio.

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