Updated April 6, 2021 by Bob Ciura
The Dividend Aristocrats are a group of 65 companies in the S&P 500 Index with more than 25 consecutive years of dividend increases. By and large, they are some of the highest quality dividend growth investments in the entire stock market.
For a full downloadable table of all 65 Dividend Aristocrats, plus some key financial metrics like value for money, click the link below:
This update will cover the grocer Sysco (SYY). Sysco has a long history of steady dividends and regular dividend increases. The company has paid a quarterly dividend since going public in 1970.
Sysco has many attractive qualities as a dividend growth stock. It is the largest company in its industry, offering higher profit margins and lasting competitive advantages over its smaller competitors. 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, the company had sales of just $ 115 million. Since then, the company has grown steadily over the past five decades. Last year, Sysco had sales of more than $ 60 billion.
Today Sysco is the largest grocer in the United States. The company sells products such as fresh and frozen food, as well as dairy and beverage products. It also offers non-food products such as dishes, cookware, restaurant and kitchen supplies, and cleaning products.
The company has a wide range of customers including restaurants, healthcare facilities, education and government offices, travel, leisure and retail businesses. It also has a large segment of other types of customers such as bakeries, churches, civic and fraternal organizations, distributors, and international exports.
Sysco has a total of around 600,000 customers. The position at the forefront of the food distribution industry offers Sysco high profit margins and future growth potential.
The working atmosphere for Sysco has been challenging over the past year as the coronavirus pandemic forced the closure of restaurants and other eateries that make up Sysco’s customer base.
Fortunately, Sysco remained profitable in 2020 and is hoping for a more marked recovery in 2021. On February 2, 2021, Sysco announced the results of the fiscal year 2021 for the second quarter. Revenue declined 23% for the quarter while gross profit declined 26% year over year. For the first half In fiscal 2021, revenue declined 23% while gross profit declined 25%. In the first six months of the financial year, earnings per share fell by 65%.
With the opening of restaurants and other eateries, investors hope that Sysco will continue to gradually grow its sales and profits.
Source: Investor Presentation
The combination of organic sales growth, sales growth through acquisitions and share buybacks is expected to result in ~ 7% annual growth in earnings per share in our view. We believe this is an achievable goal given the company’s strong business model and impressive competitive advantages.
Competitive advantage and recession performance
The US food service industry is highly competitive. There are thousands of competitors at Sysco, including other grocers, as well as wholesalers or retailers, grocery stores, and online retailers. Sysco is also exposed to the risk that its customers negotiate directly with its suppliers.
However, what has kept competitors in check for so many years is that Sysco is the largest operator in the industry. It controls approximately 16% of the US food service industry. Sysco operates over 300 sales offices worldwide and serves over 600,000 customer locations. Such a large presence enables Sysco to keep costs down and pass the benefits on to its customers.
Another benefit of Sysco’s business model is that it is resistant to recessions. Everyone has to eat, which will bring Sysco some demand regardless of the state of the US 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 (up 13%)
- 2009 earnings per share of $ 1.77, down 2%
- 2010 earnings per share of $ 1.99, up 12%
Sysco increased its earnings per share in the years 2008 and 2010 by double digits, although it only decreased slightly in 2009. The company increased earnings from 2007 to 2010, which was a rare feat.
Thanks to the stable industry and the highest competitive position of Sysco, Sysco has been able to increase its dividend every year even in recessions.
Valuation and expected return
While the coronavirus pandemic had a huge impact on Sysco, we believe the company has achieved normalized earnings power of $ 2.90 per share. On that basis, the stock has a price / earnings ratio of 28.1. Our fair value estimate is a price / earnings ratio of 20, which means the stock is currently trading well above fair value.
Since Sysco is an overvalued stock, if the P / E ratio drops to 20 over the next five years, annual returns could be reduced by 6.6% per year. Instead, shareholder returns are generated through earnings growth and dividends.
Fortunately, Sysco doesn’t have to rely on multiple expansion as the company has an attractive growth profile and dividend. We anticipate that Sysco will achieve annual earnings growth of up to 7% in the future, consisting of organic growth, acquisitions and share buybacks.
Additionally, Sysco has a current dividend yield of 2.3%, which is a higher return than the average return of the broader S&P 500 index. This results in an expected total annual return of 2.7% per year over the next five years. This is a poor expected return that makes the stock a sell due to valuation issues.
Sysco is unlikely to have any problems increasing the dividend in the future. A payout ratio of 62% is forecast for the 2021 financial year. This shows that the dividend is more than adequately covered.
Sysco is at the forefront of a stable industry. It has a solid position in the industry and should see steady demand even during recessions. These characteristics make Sysco a reliable source of income.
Sysco is on the exclusive list of the Dividend Kings, a group of stocks with more than 50 consecutive years of dividend increases.
The stock is overvalued, which means this is not the best time to buy it. The Sysco share is currently at an all-time high. We believe future returns will be satisfactory, but not spectacular, for investors who buy the stock at its current valuation level.
However, we believe that even with this valuation, the stock can generate positive returns through earnings growth and dividends. As a result, Sysco remains a quality stake within a dividend growth portfolio, but the stock is not a buy at current price.
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