Articles Comments

My FI Journey » Stock Analysis » Sysco (SYY) Dividend Stock Analysis

Sysco (SYY) Dividend Stock Analysis

sysco-logo-homeSysco is a major distributor of food and food related products, particularity to restaurants and cafeterias. Sysco distributes meats, fruits, vegetables , canned foods, frozen entrees, beverages, basically food and drinks of all types.  Sysco also supplies related products like silverware, cookware, kitchen supplies etc.  They are predominantly based in the US, with 89% of their sales coming from the US and another 10% coming from Canada. In 2012, Sysco’s customer base was divided roughly as follows: 63% restaurants, 10% hospitals and nursing homes, 5% hotels and motels, 6% colleges and schools, 16% other.  Currently they have about around 400,000 customers served by 185 distribution facilities.  In 2012, no single customer accounted for more than 10% of SYY’s sales.  Sysco works to expand it’s business by increasing sales, attracting new clients, and acquiring competitors.  Sysco is currently implementing plans to increase productivity and reduce their cost structures.

SYY Basic Company Stats

  • Ticker Symbol: SYY
  • PE Ratio: 17.07
  • Yield: 3.5%
  • 5 year revenue growth (2008-2012): 3.1%
  • % above 52 week low: 95.8%
  • Beta: 0.71
  • Market cap: $18.55 B
  • Website: www.sysco.com

SYY vs the S&P500 over 10 years

SYY vs SP500

SYY has consistently underperformed the S&P500 for the last decade.  By the end of 2012 an investment in SYY would have increased by about 7%, compared to rising about 60% for the S&P500.

SYY Earnings Per Share (EPS) & Dividend Growth

SYY 2012 div and eps

  • 5 year EPS growth: 1.2%
  • 10 year EPS growth: 5.4%
  • 5 year dividend growth: 5.3%
  • 10 year dividend growth: 10.5%

EPS for Sysco have been respectable, but appear to be leveling off in recent years.  Similarly, SYY’s dividend growth appears to be slowing down rapidly.  The 10 year dividend growth rate was 10.5%, the 5 year growth rate as 5.3%, and the one year growth rate is only 3.8%.  However, as the economy improves and people return to eating out, these numbers may improve.

With a starting yield of 3.5% and a growth rate of about 4%, SYY’s yield on cost will grow to about 5.9% in 10 years.  In order to double the dividend, using the rule of 72, it will take approximately 18 years.  This is kind of slow for my tastes.

SYY Payout Ratio

SYY 2012 payout ratio

SYY’s payout ratio has remained below 60% for the last 10 years.  The average payout ratio over the last 10 years is 48%.  The payout ratio isn’t bad.  However, if the payout ratio continues to increase, there is less room available for dividend growth.  Indeed, this seems to be bearing out as dividend growth has been slowing down as payout ratio has been increasing.

SYY Cash Flow and Revenue

SYY cash flow per share

  • 10 year revenue growth (2003-2012): 5.5%
  • 5 year revenue growth (2008-2012): 3.1%
  • 3 year revenue growth (2010-2012): 6.3%

This is kind of a mixed bag.  SYY has achieved positive cash flow over every year of the last 10 years, with a generally increasing trend.  On the other hand revenue growth has been slowing down and even reversing over that time, but picking up again.  Given that ~63% of SYY’s sales come from restaurants, and that people are eating out considerably less since the great recession, this makes sense.  It is likely that if the economy continues to improve, people will return to eating out, and SYY’s revenue will begin to grow again.

SYY Balance Sheet

The current debt to equity ratio is ~61%.  This ratio has been decreasing over the last decade, which is a good sign.  But the company remains highly leveraged.

SYY Risks

With ~63% of their sales coming from restaurants within the US, SYY is sensitive to the economic recovery, which is currently far too slow.  Also, one of the results of the Great Recession has been a severe shift away from eating out.  The economy has yet to recover, but it remains to be seen if people will return to their pre Recession habits of dining out multiple times per week.  If anecdotal evidence is any guide, I would say that this is almost guaranteed.

SYY Graham Number Valuation

The Graham number represents one very simple way to value a stock.  The Graham number for SYY is $18.77.  The curent stock price is well above that, suggesting that SYY may be overvalued at the moment.

SYY Cash Secured Puts

At this point, I would prefer to hold off on purchasing SYY and would also hold off on selling cash secured puts against it.

Conclusions

I would consider SYY to be a hold at this point. The stock doesn’t seem to be growing, nor is the dividend growth anything to write home about.  If I were into writing covered calls, I investigate writing a few against SYY in the hopes of driving down my cost basis and generating a bit of extra cash.

Disclosure: None.

Readers:  What are your opinions about Sysco?

Written by

Filed under: Stock Analysis · Tags: , ,

9 Responses to "Sysco (SYY) Dividend Stock Analysis"

  1. Underperforming the S&P by over 50% over 10 years.. I don’t think I could buy into a company like that. I agree with your valuation though, hold if you have it, but don’t buy into it.

    1. SYY looks pretty stable. There might be a huge dip sometime that makes it a buy. But otherwise, I’m just going to keep looking.

  2. My Fi,

    I agree. SYY operates in a very low margin space and they typically will absorb some rising input costs so as to offset any potential loss in key accounts. I think it’s an okay business, and a below average stock.

    That’s not to say things can’t improve here. The great thing is that it is by far the biggest competitor in this space, and that gives it great leverage and economies of scale. It’s been hard to use some of that leverage over the past few years because the economy has been so shaky, but overall I think it’s still a solid company.

    It’s my smallest holding and I don’t plan on changing that anytime soon.

    Best wishes!

    1. I do actually like the company. It’s a solid business model and a dominant player in the field. But after doing the analysis, I just can’t justify initiating a position in it.

  3. Integrator says:

    I agree with your assessment here. Sysco is a solid player with a dominant position in a low margin business. If revenue growth was a little stronger and payout wasn’t so high, I would certainly consider this a little more strongly. The 5 and 3 year revenue growth numbers are the real problem in my mind. I can’t get comfortable with a dividend growth stock who’s revenue is flat to declining.

    1. Slow or negative revenue growth is acceptable in a recession. That kind of makes sense. But by now most companies are back to increasing revenue. I would feel more comfortable with SYY if that were also the case for them.

  4. Liquid says:

    Great analysis. Looks like a really stable stock. Not sure about it’s ability to increase earnings in the future but it will probably still do well given a long term horizon. I would probably buy some for the dividend as it’s yielding higher than 10 year treasuries, yet isn’t a very volatile stock. I heard a lot of fixed income investors are moving from bonds to defensive dividend producing equities :D

    1. Liquid,

      Thanks for stopping by. If you’re just looking for yield, you can find some companies that will give you just as good a yield, but with way better growth prospects. COP being a good example. No reason why you shouldn’t try to get the best of both worlds.

  5. I agree about SYY although if/when the economy picks back up the revenue growth could come back. They’ve been trying to grow through acquisition lately so we’ll see how that changes things once everything is fully integrated. On a pretty significant pullback I’d think about starting a position but it’d have to be giving at least a 4% yield since the growth prospects are lower.

    Thanks for the analysis!

Leave a Reply

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>