Company Description: Sysco Corporation, through its subsidiaries, engages in the marketing and distribution of a range of food and related products primarily for the food-service industry in the United States and Canada.
Fair Value: I consider four calculations of fair value, (see page 2 of the linked pdf for a detailed description):
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
SYY is trading at a discount to 1.) and 3.) above. The stock is trading at a slight premium to its calculated fair value of $30.59. SYY did not earn any stars in this section.
Dividend Analytical Data: In this section there are three possible stars and three key metrics, (see page 2 of the linked PDF for a detailed description):
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
SYY earned two stars in this section for 2.) and 3.) above. The stock earned a star as a result of its most recent debt to total capital being less than 45%. SYY earned an additional star for having an acceptable score in at least two of the four key metrics measured. The company has paid a cash dividend to shareholders every year since 1970 and has increased its dividend payments for 39 consecutive years.
Dividend Income vs. Money Market Account (MMA): Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)?
This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked pdf for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
SYY earned a star in this section for its NPV MMA Diff. of the $670. This amount is in excess of the $500 target I look for in a stock, that has increased dividends as long as SYY has. If SYY grows its dividend at 6.5% per year, it will take 3 years to equal a MMA yielding at an estimated 20-year average rate of 3.71%. SYY earned a check for the Key Metric ‘Years to >MMA’ since its 3 years is less than the 5 year target.
Other: SYY is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index.
Conclusion: SYY did not earn any stars in the fair value section, earned two stars in the dividend analytical data section and earned one star in the dividend income vs. MMA section, a total of three Stars. This quantitatively ranks SYY as a 3 Star-Hold.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $33.67 before SYY’s NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 39 years of consecutive dividend increases. At that price the stock would yield 2.91%.
Resetting the D4L-PreScreen.xls model and solving the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 5.7%. This dividend growth rate is lower than the 6.5% used in this analysis, thus providing a margin of safety. SYY has a risk rating of 1.25 which classifies it as a low risk stock.
The weak economy has led to weak consumer discretionary spending. In 2009, 62% of SYY’s sales were to restaurants. Thus, they have felt the full brunt of the downturn. This has carried over to the company’s financials. With a 116% free cash flow payout, SYY is treading water hoping the economy will turn soon. Although SYY is trading close to my buy price of $30.59, I plan to wait on its free cash flow payout to improve before adding to my position. For additional information, including the stock’s dividend history, please refer to its data page.
Disclosure: At the time of this writing, I was long in SYY (4.2% of my Income Portfolio). See a list of all my income holdings here.