Key Risks
As we mentioned earlier, the wholesale food distribution market is very mature. With SYY’s planned takeover of U.S. Foods getting rejected by the FTC, meaningful growth will be even harder to come by.
Smaller specialty distributors have also taken away some higher-margin restaurant business from SYY, and the sluggish economy has resulted in generally softer restaurant sales over the last few years. These factors have created some price pressure and suppressed SYY’s margins.
SYSCO Corporation (NYSE:SYY) is taking action to combat these factors by offering a more localized approach to many of its customers. This includes offering locally produced foods and ingredients targeted more specifically at particular demographics. We expect SYY to also be more acquisitive of these local and regional niche distributors.
Otherwise, it seems like Amazon is worth mentioning as their reach continues to extend into many different markets. They specialize in warehousing, inventory management, and delivery capabilities, but it seems like more of a stretch for them to establish all of the supplier relationships that SYY has. The inventory and delivery mechanisms for wholesale food are also very different.
Perhaps the bigger risk would be if large national accounts or food producers decided to enter the distribution business themselves and cut out the middleman. However, this doesn’t seem to be happening today – probably because of its capital intensity and low value-add.
Finally, it’s worth mentioning that swings in commodity prices (e.g. fuel) and consumer spending patterns (e.g. grocery vs. restaurants) can impact SYY’s results from time to time. However, we don’t believe these factors have an impact on the company’s long-term earnings potential.
Dividend Analysis
We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. SYY’s long-term dividend and fundamental data charts can all be seen by clicking here.
Dividend Safety Score
Our Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
SYY’s dividend is very secure with a Safety Score of 93. We can see that the company’s payout ratios have increased over the past decade to about 70% today. While that is on the higher side of what we like to see, it is a reasonable level for SYY because the business is so steady. However, it does suggest that future dividend growth will need to more closely align with the company’s earnings growth.
Source: Simply Safe Dividends
SYY EPS Payout Ratio
A high payout ratio can be dangerous if a company’s earnings are cyclical. However, SYY is a very stable business. As seen below, the company’s sales dipped by just 2% in fiscal year 2009. While less people eat out at restaurants during difficult economic times, they still need to consume food. SYY’s stock fell 23% in 2008 but outperformed the S&P 500 by nearly 15%.
Source: Simply Safe Dividends
Despite its low margins, we can see that SYY has generated a solid return on invested capital over most of the past decade. Returns have decreased a bit in recent years, but it otherwise looks like a company that has a bit of an economic moat.
Source: Simply Safe Dividends
SYY has also generated free cash flow ever year. It’s interesting to note that free cash flow meaningfully increased during the recession. This is because the company does not have to build up as much inventory and working capital when demand falls, allowing it to sell its existing inventory and raise more cash.
Source: Simply Safe Dividends
