Sysco More Attractive than Cisco

Sometimes potato chips are better than microchips (or routers). To that end, I recently recommended the purchase of Sysco Corp (SYY) to Dividend Gambit subscribers.

The firm is the largest foodservice marketer and distributor in the U.S., which is a very boring but profitable business (i.e. the kind you should love). Many have likely seen the company's big silver trucks chugging around town delivering goods to restaurants, hotels, schools, and hospitals across the U.S. and Canada.

The firm has lost about one-third of its value during the most recent leg of this market downturn, which is largely due to concerns over the dismal outlook for the restaurant business. My long-term readers know that I have never been willing to bet on any single restaurant stock, as I largely see the sector as a commoditized space with little pricing power and extreme economic sensitivity. However, the company that supplies the goods and services to all of those restaurants is a different story entirely. That business is far more stable, enjoys much higher profit margins, and has significant barriers to entry. And most don't realize that a full one-third of Sysco's business comes not from the cyclical restaurant industry, but rather from the more concrete demand arena of schools, hospitals, nursing homes, and hotels.

Even in this abysmal economy Sysco has managed to grow its sales at a 7% clip. Better still, it has increased its earnings at twice that level due to an aggressive share buyback program. And it recently announced a dividend hike of 9%, continuing its 38-year string of annual increases. In essence, we're capturing much higher earnings and yield growth than that being offerred by the broad market, yet we're getting it at a below-market multiple.

And consider that the company has achieved these gains in an environment where commodity prices were off the charts. So I believe we can expect still greater performance from the distributor in a world where gasoline and many other input costs have been cut in half.

Even if higher commodity prices somehow return, the company has wrung efficiencies from every possible source during the past year, so they'll remain well positioned. They've done everything from increasing the number of cases carried on each truck to streamlining their delivery routes. And these cost-saving efforts will create significant earnings leverage as the economy improves.

In short, this is a staple holding for virtually any portfolio. The stock has fallen considerably from its high despite showing remarkable earnings resiliency and an ability to significantly grow dividends, which has created the value we see today. And it's extremely unusual to capture a secure dividend yield of 4.2% along with this level of earnings growth (and that's particularly true in a market where the 10-year Treasury bond is yielding little more than 2.7%).

All in all, Sysco is an extremely consistent company that has excellent long-term growth prospects, and it continues to consolidate what has historically been a fragmented industry. I have no doubt that management will keep using its 180 distribution and self-service food centers to dominate the competition. The stock is a buy below $25.

Disclosure: Author holds a long position in SYY

Comments

[mdpath:]

Over the years the stock has been a poor performer but the dividend makes it a good conservative holding.

Apr 03 10:08 AM

[Trophybob:]

From someone who has not only visited this company doing sign installations over the year and watched their trucks steady deliveries at the restaurants I do business with regularly. I supplied to this company and watched it grow over the past 15 years I like this stock. They are a company on the move and steady. No flashy changes but a solid player in the food service industry supply chain..

Apr 04 02:39 PM

[weiwentg:]

over the last few years Sysco has underperformed because blue chips in general have underperformed. in contrast, the lower-quality stocks have outperformed. I just bought Sysco myself.

Jun 14 09:36 AM