TipRanks Smart Dividend Newsletter – Edition #40
Hello and welcome to the 40th edition of TipRanks’ Smart Dividend – a weekly Newsletter providing you with investment ideas for safe-bet quality stocks that are outstanding dividend payers, compared to their peers.
Investment Thesis: Food For Thought
In the vast landscape of investment opportunities, the food distribution industry is a sector often underestimated for its investment value. However, this industry, characterized by inherent stability and steady growth, is well-positioned to support earnings and dividends for years to come. In this realm, best-of-breed companies within the food distribution sector offer a rare combination of resilience and reward. These industry leaders stand out for their ability to deliver consistent dividends, presenting a compelling opportunity for those seeking a blend of regular income and capital appreciation.
Let us present one such company, which is a compelling income investment idea.
This Week’s Quality Income Stock Idea
Sysco Corp. (SYY) is an American multinational corporation that markets and distributes a range of food, food products, smallwares, kitchen equipment, and tabletop items to restaurants, healthcare and educational facilities, hospitality businesses, and wholesale to other companies that provide food service. SYY is one of the largest food distributors worldwide, serving customers in over 90 countries.
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Company Overview
Founded in 1969, Sysco Corporation (an acronym for Systems and Services Company) has grown and expanded its services, mainly through numerous acquisitions of smaller distributors. Today, with a market capitalization of $40.2 billion and annual revenue of $76.3 billion, the company ranks as #56 in the Fortune 500 list of largest U.S. firms by revenue.
The company operates through two main business lines: U.S. Foodservice Operations, responsible for ~70% of total sales, and International Foodservice Operations. The U.S. Foodservice Operations manages the Broadline unit, the company’s largest business segment responsible for the distribution of full lines of products, and the Specialty Services unit, providing customized menu and delivery options. The International Foodservice Operations operates food distribution outside of the U.S. and Canada. In addition, Sysco holds an independent subsidiary, Sygma, which specializes in service to restaurant chains.
Sysco Corp.’s stock has been traded on the New York Stock Exchange (NYSE) since 1970. It is a member of the S&P 500, the Russell 1000 large-cap index, the Dow Jones Industrial Average, and numerous other indexes.
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Business Prospects
Sysco is America’s largest wholesale food distributor, holding a market share of ~17%. Though not a high-growth business model, food distribution is expected to continue its steady growth for years to come. Within its industry, SYY occupies the largest space as the dominant U.S. food distributor. As long as the company manages to maintain and increase its market share, it will be able to generate reliable revenues and cash flows.
Sysco’s large-scale operations, which far outpace those of its peers, allow cost savings that can be passed on to its customers, creating a sustainable competitive advantage. SYY’s lead over its competitors is also supported by its higher operational efficiency, thanks to its well-developed distribution network and proprietary technological tools which allow it to reduce costs and provide better service.
In addition, thanks to Sysco’s industry dominance, the company wields significant pricing power over customers and purchasing power over its suppliers. Other strengths of the company include wide customer diversification, with broad geographical distribution of an extensive line of food and non-food items, supporting revenue stability. Besides, SYY’s business model supports resilience, with the recent rebound from the pandemic-related crisis serving as further proof of its efficient, reliable, and profitable business.
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Dividend Analysis
The stability and reliability of Sysco Corp.’s business support its capital allocation strategy, centered around investment in business expansion as much as returning capital to shareholders through dividends.
Sysco is a Dividend King, belonging to the most elite group of dividend-paying companies: those who have increased their dividends every year for at least 50 years in a row. SYY features a track record of 54 years of consistent dividend increases. In the past decade, the dividend has grown at a CAGR of 5.8% and is expected to continue increasing at a rate of ~5% for years to come. Its current dividend yield stands at 2.5%, above the Consumer Staples sector’s average of 2.1%.
The safety of the dividend is supported by the company’s moderate EPS-based payout ratio of 47% and cash payout ratio of 42%, which leaves the company with ample capital and cash to pursue business growth after accounting for dividends. With a history of constant, uninterrupted dividend increases spanning over half a century, Sysco stands out as one of the most reliable dividend payers in the U.S. stock market.
Sysco’s robust financial health is another key factor supporting the outlook for continued dividend increases. While the company has a large debt, it is well-covered by operating cash flow, with the interest payments well-covered by EBIT. SYY is the only U.S. food distributor with an investment-grade credit rating, rated “BBB” by S&P Global and Fitch Ratings and “Baa1” by Moody’s.
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Total Return Outlook
On January 30, the company reported its fiscal Q2 2024 (ended December 30, 2023). The report featured solid results, with the business strongly recovering from the pandemic slump and the subsequent food-price inflation. Revenue was in line with analyst expectations, rising 3.7% year-on-year, while the adjusted EPS beat the consensus for a third consecutive quarter, increasing by 11.3% year-on-year. In the past decade, SYY’s earnings-per-share increased at a CAGR of 9.5%. The forward long-term EPS growth estimate is ~13%.
Following strong earnings results in the past three quarters, and, taking into account SYY’s robust business outlook and strong competitive position, several analysts from prominent Wall Street firms (J.P. Morgan, Morgan Stanley, Barclays, and others) lifted their stock-price targets for the company.
TipRanks-scored top Wall Street analysts see an average upside of 10.4% for SYY stock over the next 12 months even after its almost 30% surge from the broad-market October lows. The stock has gained 7% over the past 12 months.
Stock-price appreciation is expected to be supported by share repurchases, which Sysco has been performing over the past decade on an opportunistic basis. Thus, in the past four quarters, the company repurchased $432.5 million of its shares. Following the strong results in the fiscal H1 2024, the company said it is increasing its share repurchase expectations from $750 million to $1.25 billion for FY 2024 versus the prior guidance.
Despite the recent strong increase, Sysco’s stock continues to trade at very reasonable valuations. SYY is undervalued compared to the Consumer Staples sector, industry, and peer average. This is the case despite the fact that it is the largest and the most profitable among its peers, and the only food services company to pay dividends. In addition, SYY trades about 40% below its fair value, based on future estimated cash flows. These factors position Sysco within the value stock universe.
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Investing Takeaway
To conclude, Sysco Corp. is a large, stable, low-risk business with a diversified customer base and a strong competitive position in its sector. The strength of its balance sheet and free cash flow generation allows the company to invest for growth while also rewarding its shareholders through dividends and buybacks. The stock’s current valuations suggest that SYY combines both value and income proposition, and therefore is well-suited to be a part of long-term income portfolios.
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Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment, and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
