Sysco, A Dividend Aristocrat That Provides Food for Smart Investment Thinking

Sysco (SYY), the company that sounds like the other more famous Cisco (CSCO), was founded in 1969 and started paying dividends in its first year. Since then, it has increased the dividend every year, for 41 consecutive years, easily enough to qualify as a Dividend Aristocrat. Last November SYY extended its streak, raising the quarterly dividend 4% to 26¢ per share.

Sysco markets food and related products to the foodservice industry in the U.S. and Canada, distributing frozen foods, dry foods, fresh meats, dairy products, beverage products and imported specialties and fresh produce. In addition it supplies non-food items: Paper products, tableware, cookware, restaurant kitchen equipment and cleaning supplies. Products are sold to restaurants, hospitals, schools, hotels, motels, lodging establishments and industrial caterers. SYY delivers more than 1 billion cases of food and related products to more than 400,000 customers, primarily in the U.S. and Canada. Distribution of sales were:

________________________FY2010

Canned and dry products______19%
Fresh and frozen meats_______17
Fruits, vegetables & other_____14
Dairy products______________10
Poultry____________________10
Fresh produce_______________9
Paper and disposables________8
Seafood____________________5
Beverage products___________4
Janitorial products___________2
Equipment and smallwares____2
Total____________________100%

EPS and dividends have grown but the stock did not:

________EPS___Dividends

2000___$0.68___$0.23
2001____0.88____0.27
2002____1.01____0.34
2003____1.18____0.42
2004____1.37____0.50
2005____1.47____0.58
2006____1.36____0.66
2007____1.60____0.74
2008____1.81____0.84
2009____1.77____0.90
2010____1.99____0.99

Sales rose from $19.3 billion in FY2000 to $37.5 billion in FY2008. Then sales flattened in fiscal 2009-2010 from weak economic conditions. Cost inflation of 4.7% and increased selling prices had a significant impact on sales in fiscal 2009. Sequential quarterly sales trends declined through most of fiscal 2008, all of fiscal 2009 and into fiscal 2010. Sales trends turned positive in the middle of fiscal 2010, largely from improving case volumes and favorable foreign exchange rates.

For fiscal 2010, SYY had sales of $37.2 billion and record EPS of $1.99. In a difficult year, business begin to improve in H2 from modest growth of case volume and limited inflation in food prices. With consumer confidence suffering, people are making value-focused spending decisions when purchasing away from home. Foodservice has demonstrated resilience during a tough economy and eating out remains a relatively low-cost form of entertainment (my girlfriend agrees).

In fiscal Q2 2011, sales were $9.4 billion, an increase of 5.8%. Diluted EPS of 44¢ was down a penny from the prior year. Sales for H2 fiscal 2011 were $19.1 billion, an increase of 6.6% over the prior year and diluted EPS was 95¢, down 5.0%. Results were hurt by accelerating food costs, which contributed to increased gross margin pressure and higher selling expenses. In addition, higher pension and fuel costs adversely impacted earnings.

The business transformation initiative continues to streamline processes for reducing costs and improving data availability. This is to reduce costs by establishing shared business services, currently scattered across operating companies, into a single center. The transformation process will enable SYY to better serve customers with businesses that extend across multiple SYY operating companies and use technology to shortcut repetitive ordering processes, allowing the company to focus on helping customers succeed. This initiative is key for SYY to resume its growing ways.

In 2008, SYY adopted a plan to purchase 20 million treasury shares, and six months ago a new repurchase program was adopted for an additional 20 million shares. In the last three fiscal years (when sales were sluggish), the company invested more than $1 billion in treasury stock to bring total holdings over 176 million shares. A dividend reinvestment plan allows shareholders to reinvest dividends with no service charge and also can be used to purchase additional shares.

This is a growth company, but that concept has been tested in recent years. The graph below shows the stock had an excellent run until 2000. Since then, it has had a flat performance (similar to most Dividend Aristocrats).

Sysco -- 30 years

[Click to enlarge]



SYY is not a multi-national that benefits from growing sales around the world. Outside of Canada, it has only one minor foreign business (in Ireland). Growth is dependent on improving business in the U.S. and Canada. The transformation initiative should pave the way for higher earnings, but that could take time. Higher food prices are a global phenomenon affecting all food companies. Analysts are looking for EPS to slip to $1.91 in FY2011 and rise to $2.07 in FY2012 (a new record).

The company should keep a modest payout ratio around 50%, suggesting the annual dividend increase in November will be 4¢. This is a stock for a patient investor willing to accept a 3¾% yield while the company copes with rising food costs and its ability to pass higher costs to customers. Economic recovery in the U.S. should bring top line growth at SYY and higher stock prices. In the meantime, pullbacks from $28.03, bringing higher yields, will make for more attractive buying opportunities.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.