Over the year, major market indices have been rising by nearly 15%. At the end of the first quarter, many corporate earnings have reached record levels and their dividends have grown accordingly. For dividend growth investors, my goal is to point-out stocks with increasing profits and growing dividends combined with increasing payouts, at favorable valuations. I think SYSCO Corporation (NYSE:SYY) meets this criteria.
Sysco distributes a line of fresh, frozen and canned goods along with beverage and specialty items for consumption. The corporation has a 17.5% share in the food-service distributor market worth $225 billion, catering to 0.4 million customers in various industries. It has also expanded into other profitable niches like education, healthcare, and lodging. Food distribution is a low-margin, capital-intensive business, but SYSCO Corporation (NYSE:SYY) consistently manages to return on invested capital by exceeding estimates.
Dividend Profile
Sysco has been consistently increasing its dividends over the years. The company has an established history of paying dividends. At present, SYSCO Corporation (NYSE:SYY) offers a quarterly dividend of $0.28 per share, yielding 3.13%. The company paid dividends of $1.08 per share for the fiscal 2012. In the past 10 years, the company has been able to enlarge its dividends by 154.5%. In TTM, its payout ratio based on dividends stands at 63.7%. In the last five years, it has been continually able to enlarge its payout ratio. Let us dig into its financial position to analyze its ability to sustain dividends.
Financial Analysis
Sysco’s financial position is consistently stable. The company has been showing a smart investment strategy combined with strong management. SYSCO Corporation (NYSE:SYY) is well-known for its timely and perfect delivery of orders. Its strategy of competitive pricing and close contact with customers enable it to maintain and grow its market share. Sysco also invests heavily to gain customer satisfaction. In the past three years, it has invested $1.9 billion in technology, delivery fleet and capital asset enhancements.
Its top-line growth is solid. At the end of the recent quarter, its revenue increased by 4% to $10.9 billion. However, the company was not able to convert high revenue growth into massive profits. At the end of the third quarter, SYSCO Corporation (NYSE:SYY)’s operating earnings declined by 23.2% to $337 million. The company’s margins condensed mainly due to a depressed economy which induced cost-pull inflation. As a result, its cost of production increased by 2.4%.
Decreased profitability also impacted its cash flows. Still, the company has a strong cash position to support dividends. Its free cash flows provide cover to its dividend. In the TTM, its free cash flows stand at $731 million when dividend accounts for $640 million.
SYSCO Corporation (NYSE:SYY)’s financial health displays no risk of solvency. Its high current and quick ratios symbolize this trend. At the end of the latest quarter, its current and quick ratios stand at 1.74 and 1.2, respectively. Debt to equity is also in line with the industry average of 0.5. High current and quick ratios demonstrate that the company has sufficient cash resources to pay current liabilities.
Industry Analysis
One of Sysco’s main peers in the food and staples retailing industry is United Natural Foods, Inc. (NASDAQ:UNFI), Inc. In the consumer staples sector, it is competing with Core-Mark Holding Company, Inc. (NASDAQ:CORE). United Natural Foods distributes organic, natural and specialty foods and non-food products in Canada and United States. Over the past ten years, it has been a primary supplier to Whole Foods. It is also increasing its revenue base by targeting supermarkets, gourmet stores and food service producers. United Natural Foods, Inc. (NASDAQ:UNFI) do not offer any dividends at present. It is a growth stock. The stock looks pricey with the current valuation. It looks pricey to me with PE and PB ratio of 26.6 and 2.5 when industry average is at 19.0 and 2.0. However, this company has shown solid financial performance over the years.
Core-Mark markets fresh and broad-line supply solutions to the convenience retail industry in North America. The compactness of Core-Mark’s strong and diverse revenue base give the company with steady revenue streams and potential growth opportunities. As a result, in the past three years, its revenue growth on average stands at 10.8%. The company is benefiting from the increased focus on fresh food and the growth in single convenience stores. Core-Mark look undervalued compared to its peers with a P/E and PB ratios of 20.0 and 1.7.
Final Notes
SYSCO Corporation (NYSE:SYY) is one of the best companies in the food distribution industry. It has been providing solid returns to investors. It has a dependable financial situation to back its dividends. The company’s cash reserves are enough to pay current liabilities and dividends. It has shown excellent management, very good consumer satisfaction and an intense concentration on quality assurance.
siraj sarwar has no position in any stocks mentioned. The Motley Fool recommends SYSCO Corporation (NYSE:SYY).
The article Sysco Corporation: Strong Dividends Set to Continue originally appeared on Fool.com.
siraj is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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