Sysco Corporation (SYY) is a steady dividend stock that has rewarded investors for a very long time. Since 1970, Sysco has raised its dividend 47 times.
This makes Sysco one of only 50 Dividend Aristocrats – stocks wiht 25+ consecutive years of dividend increases in the S&P 500. You can see a list of all Dividend Aristocrats here.
The company has an amazing track record of dividend increases, but its dividend record lately has been much less impressive.
Sysco is highly profitable, but it isn’t growing at high rates. This has limited its ability to raise its dividend over the past few years.
[drizzle]It has been one full year since Sysco’s last dividend increase. It typically increases its dividend in November. And, since its investors hold the stock largely for the dividend, it is reasonable to think the company will raise its dividend by the end of the month.
This article will provide a framework for what Sysco investors should expect when the company increases its dividend.
Business Fundamentals
Sysco is a food distributor. It services a wide range of customers, primarily restaurants. But it also serves many other industries as well.
Source: 2015 Annual Report, page 3
Sysco has had an amazing history. In its first year after going public in 1970, total sales were $115 million. Last year, Sysco’s sales eclipsed $50 billion. That is a huge growth rate over Sysco’s history.
And yet, the recent past has been much more difficult for the company. Sysco’s earnings-per-share have declined 14% over the past five years.
A big reason for this is rising operating expenses. Sysco operates in a highly competitive industry. In fact, in its 2015 annual report, Sysco noted there are more than 16,500 companies engaged in foodservice distribution.
The company needs to spend significant amounts of money to retain market share. But this spending has worked successfully, as the company captures 16.4% of the massive $295 billion U.S. foodservice market.
Put differently, Sysco’s significant market share is a competitive advantage. Sysco still has a number of competitive advantages that protect its market share. First and foremost, is Sysco’s massive size and scale.
Sysco operates 194 distribution facilities serving approximately 425,000 customers. Its distribution network is simply unparalleled in the food distribution industry. And that results in a high barrier to entry.
So while Sysco’s growth has slowed down, its industry dominance remains. Sysco’s scale allows it to generate high margins, even when the economy goes into recession. The company stayed highly profitable, even during the Great Recession:
- 2007 Earnings-per-share of $1.60
- 2008 Earnings-per-share of $1.81
- 2009 Earnings-per-share of $1.77 (recession low)
- 2010 Earnings-per-share of $1.99 (new earnings-per-share high)
This is another advantage of Sysco’s business model: everyone needs to eat. Spending on eating out typically declines during recessions, which does weigh on the company’s bottom line. But the declines at casual restaurants are usually offset by higher spending on fast food, which helps mitigate the negative impact.
Growth Prospects
Since Sysco operates mostly in North America, and in a highly saturated industry, its growth prospects will be reliant on U.S. economic growth for the time being.
Sysco does have an emerging international business, thanks largely to its $3.1 billion acquisition of U.K.-based Brakes Group.
Source: First-Quarter Earnings Presentation, page 12
Still, the acquisition was a bolt-on deal, and not truly transformational. And, it will take time to grow the international business to a level that moves the needle.
As a result, Sysco will remain reliant on the U.S., which is a low-growth economy. That limits its growth potential.
Sysco’s biggest growth catalyst moving forward is margin expansion. The company is utilizing its scale to generate significant efficiency gains in supply chain and distribution. Sysco also plans to lower administrative costs.
Continued margin expansion will hopefully restore higher earnings-per-share growth for the company.
Source: First-Quarter Earnings Presentation, page 8
Sysco was counting on its offer to acquire major rival U.S. Foods in a huge $8.2 billion deal. But the deal was scrapped on anti-trust concerns. Had the deal gone through, Sysco’s margin expansion and potential synergies would have more meaningfully impacted its earnings growth.
So, Sysco will have to make do with the Brakes acquisition, which will have a more muted impact on future earnings growth.
Based on Sysco’s fundamentals, such as its steady profitability, there is good reason to expect an imminent dividend increase. That being said, Sysco investors should temper their expectations. Sysco’s earnings growth has slowed, and the company has only modest growth prospects moving forward.
Dividend Analysis
Over the past several years, Sysco’s dividend growth rate has slowed significantly, as its earnings growth has stagnated.
For example, since 2009 Sysco’s dividend increases have been just $0.01 per share on a quarterly basis.
Sysco’s current annualized dividend of $1.24 per share represents 76% of its fiscal 2016 earnings-per-share. This is a fairly high payout ratio level, as a percentage of earnings. Analysts currently expect Sysco will grow earnings-per-share by 9.5% next year, thanks largely to its margin expansion efforts.
As Sysco’s cost-cutting efforts gain traction, there is a good chance that future growth will eventually accelerate. However, for this year, and perhaps next year, Sysco management is likely to remain conservative with its dividend increases.
The company is still pursuing mergers and acquisitions as a path for growth, which will utilize significant financial resources. That means there is enough room for Sysco to raise its dividend on schedule, but it will likely be another modest one.
As a result, Sysco is likely to raise its quarterly dividend by another $0.01 per share. If that is the case, Sysco’s new forward annualized dividend would grow to $1.28 per share. This would provide a 2.4% dividend yield based on the current share price.
Final Thoughts
Sysco investors care deeply about the dividend, and the company has proven the ability to continue raising its payout during tough economic times.
The stock provides an above-average yield, compared with the 2% average dividend yield in the S&P 500.
This, along with Sysco’s remarkable stability, make the stock an appealing pick for risk-averse investors looking for current income.
However, dividend growth investors may not view the stock as attractively, given its weak dividend growth prospects.
Article by Bob Ciura
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