Sysco: A Surprising Inflation Hedge

Dec.17.08 | About: SYSCO Corporation (SYY)

Today's research recommendation is Sysco (NYSE:SYY). There are many reasons to like this stock, but we're going to address the problems first.

Currently, the overall market is still in bear mode. There have been no clear signs that we're out of the woods yet. SYY has managed to double its debt position during the years 2005 and 2006. SYY's debt to equity, according to Yahoo! Finance, is around 57%, which is pretty high in an environment where the capital markets are hesitant to finance even the best run organizations.The long term technical pattern of this stock has formed a massive head and shoulder pattern, which indicates that the stock price could fall further. Any decline below the long-term support level of $20 will bring the stock price down to the $9 level at minimum.

Now, let's focus on the redeeming elements of a company that has increased its dividend every year for 31 years in a row. First, SYY is a surprising inflation hedge. Value Line Investment Survey says that, "...inflation accounted for roughly six percentage points of the total sales gain of 7.1% for the full year (2008)."

When I compared the price performance of SYY against Agnico-Eagle (NYSE:AEM), Newmont Mining (NYSE:NEM), and Couer D'Alene (NYSE:CDE), I found that from the period of 1970 until 1983, SYY was slow to get started in reacting to the inflation of the 70s and early 80s, but in the end it beat all of these gold and silver stocks by a mile. According to Morningstar.com, on a total return basis, CDE came closest by peaking with a 192% gain in May of 1983 while SYY peaked with a 465% gain in January of 1983.

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With a 4% dividend, SYY is yielding twice what Geraldine Weiss, founder of Investment Quality Trends, believes to be an undervalued yield. The payout ratio of the dividend is of particular concern in a deflationary environment like this and SYY has a 46% payout ratio which isn't great but it isn't all that bad either.

Essentially, the current payout ratio indicates that SYY could have its earnings cut in half and still make the dividend payment.

According to Value Line Investment Survey dated October 31, 2008, SYY normally sells for 15 times cashflow. For 2008, SYY recorded a cashflow of $2.46 per share. This means that SYY "should" revert back to the mean price of $36.90 at some point in the future.

When Dow's theory is applied to SYY, I could only come up with the following figures for the upside:

  • $27.58
  • $31.00
  • $34.42

...and the downside:

  • $9.97
  • zero

With SYY within 13% of the low, this stock is well worth considering for the Bear Market rally that we're in. However, if you're of the mind that inflation is coming down the road, with all this liquidity being injected into the economy, then SYY might be a good "long-term" hedge against inflation. Good luck with your research of this interesting opportunity.

Disclosure: no positions