Updated on November 16th, 2021 by Bob Ciura
The Dividend Kings are a group of 33 companies with 50+ 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 33 Dividend Kings, along with several important financial metrics such as price-to-earnings ratios and dividend yields, by clicking on the link below:
Food distributor Sysco Corporation (SYY) 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 4.4% raise in May 2021.
Sysco stock had a difficult 2020, mostly due to the impact of the COVID-19 pandemic on restaurants and other eating venues.
However, Sysco has experienced a significant improvement in the past year, as the restaurant industry continues to recover.
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 long-term 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 fiscal year, Sysco had sales of $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 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.
Source: Investor Presentation
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.
Many of these customers have faced extreme hardship as a result of the ongoing pandemic. Social distancing restrictions in response to COVID-19 severely limited away-from-home dining options for consumers last year.
Fortunately, the U.S. economy (and the restaurant industry specifically) have rebounded over the course of 2021, which is an excellent sign for Sysco.
This isn’t the first time Sysco has faced hardships in its business. The operating climate for Sysco was highly challenged in 2008, due to the “Great Recession” that led to a sharp economic downturn.
Then in 2017, the “restaurant recession” that took place in the United States led to a slowdown for the casual dining industry.
Finally, the coronavirus pandemic of 2020 caused extended closures of restaurants and other dining venues.
Fortunately, Sysco has seen a resurgence in the past year.
On November 9th, 2021, Sysco reported first–quarter results for Fiscal Year (FY) 2022. Sales for the first quarter were $16.5 billion, an increase of 39.7% compared to the same period last year. Compared to pre–COVID–19 levels, sales were up 8%.
The core U.S. Foodservice segment led the way last quarter.
Source: Investor Presentation
Gross profit increased 33.9% to $3.0 billion compared to the same period last year.
The International Foodservice Operations returned to profitability as operating income saw improvement compared to the prior year.
For the quarter, the company earned $0.83 per share, up 144% compared to the first quarter of FY2021.
Sysco has also 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.
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.
Sysco estimates that it controls about 17% of the approximately $230 billion annual foodservice market in the U.S., as estimated by Technomic.
Sysco operates ~330 distribution facilities worldwide and serves over 600,000 customer locations. Such a huge presence allows Sysco to keep costs low, and it can pass on the benefits to its customers with competitive pricing.
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
Sysco is expected to produce adjusted earnings-per-share of $3.47 in fiscal 2022. The stock has a price-to-earnings ratio of 22.
Our fair value estimate is a price-to-earnings ratio of 20.0, which means the stock is currently trading above fair value. Reverting to this target valuation would reduce annual returns by 1.9% over the next five years.
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 7% annual earnings growth going forward, consisting of organic growth, acquisitions, and share repurchases.
In addition, Sysco has a current dividend yield of 2.5%, which is a higher yield than the average yield of the broader S&P 500 Index.
This leads to total expected annualized returns of 7.6% per year over the next five years.
Sysco should have little trouble increasing its dividend going forward. The company has an expected dividend payout ratio of 54% for fiscal 2022.
This indicates the dividend is sufficiently covered, and should continue to move higher over time.
Sysco operates at the top of its industry. Though it faced severe headwinds last year, the forward outlook is bright.
The stock is slightly overvalued, meaning right now is not the best time to buy the stock. 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 quite a buy at the current price.