Get Ready for This Food Fight
February 22, 2011 | Comments (0)
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Higher food commodity prices are starting to squeeze margins of many food producers. Two food-related companies that should be able to use dominant market share to help push price increases through to customers are Sysco(NYSE: SYY) and McCormick (NYSE: MKC). Let's put 'em in a blender and mix it up.
Companies like General Mills (NYSE: GIS), J.M. Smucker(NYSE: SJM), and Kellogg (NYSE: K) are known for delivering steady performance regardless of the economy. But margins for these stocks, along with those of Sysco and McCormick, have recently gotten squeezed by higher prices.
Strong competition can make it tough to hike prices in order to rebuild margins. That's where Sysco and McCormick shine; unlike most food companies, they have no strong competitors. Sysco's investor fact sheet states that it's the "only major public foodservice distribution company in the U.S." For McCormick, how many can name the next largest spice producer?
Sysco has a five-star (out of five) rating in Motley Fool CAPS, while McCormick has four. The table below compares some other key performance and value measures.
Measure | Sysco | McCormick |
|---|---|---|
| Dividend yield | 3.7% | 2.5% |
| Payout ratio | 39% | 38% |
| Forward P/E | 13.9 | 15.0 |
| Est. EPS growth (next 5 years) | 10% | 9.6% |
| Annual dividend growth rate (past 5 years) | 10.3% | 10.2% |
Source: Yahoo! Finance and author's calculation.
Sysco lands some hits with dividend yield and valuation, but there are a few other things to consider.
- Sysco's fleet of 8,800 trucks means it's exposed to fuel cost inflation as well as food costs.
- Sysco's business is focused on the U.S. and Canada, while McCormick generates 28% of its revenue from outside the Americas.
- In the most recent quarter, McCormick managed to increase earnings compared to the year-ago quarter, even though gross margins compressed slightly. Sysco saw both lower gross margins and lower earnings per share compared to a year ago.
In a close call, McCormick gets the decision in this food fight. Both stocks are solid choices for investors looking for growing dividend income. Sysco does look better in some categories, but a more diverse geographic revenue stream, along with better recent performance, give McCormick the edge in this showdown. I own shares of Sysco, and I plan on making the swap once the Fool's disclosure policy waiting period ends.
You can follow any of the stocks mentioned using our free watchlist service, My Watchlist.
- Add McCormick to My Watchlist.
- Add Sysco to My Watchlist
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