SYSCO Corporation (SYY): A Dependable Dividend Aristocrat for Retirement Income

If it weren’t for SYY’s reliable cash flows, its balance sheet would be somewhat concerning. The company has a lot of debt relative to cash on hand, but its debt burden is reasonable compared to its free cash flow generation. S&P has also given the company an A- credit rating.

Source: Simply Safe Dividends

While SYY has somewhat high payout ratios and a lot of debt, the consistency of its business and the strong free cash flow it generates each year make its dividend payment very safe.

Dividend Growth Score

Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.

SYY’s dividend Growth Score is 40, suggesting that the company’s dividend growth potential is below average. This shouldn’t come as a surprise given the mature state of the foodservice distribution industry, the company’s large size, and its above-average payout ratios.

Despite its lower growth profile, SYY is a member of the S&P Dividend Aristocrats Index and has paid a dividend since 1970. The company most recently increased its dividend by about 3% in late 2015, and we expect continued dividend growth in the range of 2-4% per year (the company is using most of its cash left from the failed U.S. Foods acquisition to repurchase shares).

Valuation

SYY trades at 21x forward earnings and offers a dividend yield of 3.0%, which is lower than its five year average dividend yield of 3.25%. Looking only at the earnings multiple, SYY appears to be somewhat highly valued given its lower earnings growth profile.

With that said, if the company can deliver mid-single digit earnings growth under its new three-year plan, its total return potential would appear to be around 8% per year.

With an extremely safe dividend payment, low business volatility, and activist involvement behind the stock, SYY is potentially an appealing stock for investors living off dividends in retirement. However, it looks like more of a long-term hold than a new buy today.

Conclusion

SYSCO Corporation (NYSE:SYY) is about as boring of a business as they come, but its time-tested operations, well-known brand, economic moat, and strong cash flow generation certainly qualify it as a blue chip dividend stock.

The stock’s price does not look cheap today, but we believe SYY remains a quality long-term hold for conservative investors seeking sources of safe dividend income.

Disclosure: None