Sysco: A Surprising Inflation Hedge

Today's research recommendation is Sysco (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 (AEM), Newmont Mining (NEM), and Couer D'Alene (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

Comments

[GregT:]

Good points about Sysco. However, even though Sysco might indeed be a good inflation hedge, the comparison that was made against gold mining companies was totally without merit. Sysco's stock price increased because the company grew - not because Sysco somehow magically benefits from inflation. Comparing Sysco to gold mining companies is truly apples to oranges and mostly depends upon the time range which is selected.

2008 Dec 18 08:20 AM

[Dividend Inc:]

Greeting GregT,

Thanks for reading my blog posting. The comparision with gold and silver companies is very much with merit. Especially when the whole purpose of investing in gold and silver is to beat inflation.

When Value Line says that 84% of sales were due strictly to inflation then yes, the comparision is with complete merit. After all, gold and silver stocks are supposed to be a hedge against inflation. I picked the highest inflationary post war period (considered a gold and silver bull market) and showed how you could have done better to invest in SYY than any of the gold and silver stocks. This came as a shock to me especially when I hold the physical gold and silver metals myself.

2008 Dec 18 12:49 PM

[jepittman:]

First some disclosure. I have long been a Sysco shareholder and admirer of this company. Their managment is IMO honest and shareholder committed, which I have found to be far from universal recently. I have been adding to positions during the selloff.

Many of the headwinds the company has experienced in the past two years are reversing. First and foremost is the price of oil which affects diesel fuel which the company uses to distribute its products. A significant cost of operating its fleet of trucks has been reduced. Lower gasoline prices has also had a dramatic effect on consumers' disposable income leaving more room in their budgets for meals away from home. One need look no further than the recent earnings release from Darden Restaurants for confirmation of this. The second headwind that has reversed is interest rates. Sysco operates a national network of highly complex refigerated warehouses containing billions of dollars of perishable foods. These inventories are financed with various forms of debt supplementing equity investment. The recent collapse in short term interest rates will reduce the cost of Sysco's short term borrowing and will likely offer opportunities to refinance longer term obligations at reduced interest rates.

Offsetting these factors is the rise of unemployment and the falloff of consumer confidence. While these factors are important, unemployment insurance helps keep money in people's pockets and consumer confidence affects larger ticket items more drasticly than small items like a meal out. Also, the recent share price decline has discounted these factors at least to some degree.

The author has also touched on Sysco as an inflation hedge. As a distributor the company is in a position to monitor price changes literally day to day and adjust prices accordingly. This is a big advantage during periods of price volatility in either direction. The author's contention that the company is an inflation hedge is IMO valid.

Sysco is the 800lb gorilla in the foodservice industry. They reach into not only restaurants but also schools, hospitals, nursing homes, and military bases. As the baby boomers age and approach retirement, eating out at a nice restaurant with their families is a luxury that is unlikely to be sacrificed for any meaningful period of time. Americans are going to eat out. There may be periodic slowdowns but when conditions improve it is among the very first to experience recovery. With Sysco there is no need to speculate on which restaurant chain has the right approach. If you own the supplier you are going to participate. Sysco consistently earns close to 30% return on equity (according to Value Line) and yields 4% on the recently raised dividend. Sysco is one of my favorite long term investments.

2008 Dec 20 12:27 PM

[moneygardener:]

agree fully with jep

2008 Dec 30 10:36 AM