Updated on March 8th, 2022 by Felix Martinez
The Dividend Aristocrats are a group of 66 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 66 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 has a market cap of $43.1 billion. The company has grown steadily over the nearly five decades since. Last year, Sysco had sales of more than $51 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, 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.
Source: Investor Presentation
The operating climate for Sysco was challenged over the past two years as the coronavirus pandemic forced closures of restaurants and other dining venues that make up Sysco’s customer base. Also, supply chain issues across the country.
Fortunately, Sysco remained profitable in 2021 and hopes to see a more significant recovery in 2022. On February 8th, 2022, Sysco reported second quarter Fiscal Year (FY) 2022 results. Sales increased by 41.2% for the quarter, while gross profit increased across all segments year-over-year. For the first half of FY 2022, sales are up 40.5% and gross profit increased 35.8%. Over the first six months of the fiscal year, earnings-per-share increased 174.5% for the first six months of the fiscal year compared to the first six months of FY2021.
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.
Source: Investor Presentation
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 will earn $3.05 per share for FY2022. Based on this, the stock has a price-to-earnings ratio of 25.2. Our fair value estimate is a price-to-earnings ratio of 20, which means the stock is currently trading higher than our fair estimate.
Because Sysco is an overvalued stock, annual returns could be reduced by 5.6% 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 expansions, 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 2.2%, which is a higher yield than the average yield of the broader S&P 500 Index. This leads to total expected annualized returns of 3.6% 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 2022. 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 near 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.
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 40 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: