In this article I will examine the reasons to consider shares of Sysco (SYY) as part of one's income portfolio. An illustration of the long term earnings and dividend history will provide evidence of the historical trends that one desires in a steady growing and income producing security. Valuation measures will be presented to clarify reasons to consider purchase of the shares.
The Company: Sysco is a food distributor to restaurants, convenience stores, grocery, hospital, schools, and caterers. The company was founded in 1969 and operates out of 180 distribution centers. The company began paying dividends in 1973 with annual increases for the last 41 years.
Current Fundamentals: As a large part of Sysco's sales are to restaurants, the slowing economy has limited current growth for the corporation. The company should continue to benefit from acquisitions and better management of operations and consolidated purchasing. Projected earning for the FY 2012 (June) are grouped in the $2.05-2.10 area, which is a 5-7% increase over reported earning of $1.96 for 2011. The company's earnings over the last five years are reduced from historical levels mainly due to a shift to eating at home rather than restaurants, largely caused by high unemployment.
The chart below (click to enlarge) illustrates the historical great growth of Sysco. However, the earnings line has had several minor earnings dips in 2006, 2009, and 2011. Caution is warranted for the investor should these trends continue.
Sysco has an excellent history of increasing dividends, which it has done for the last 41 years. The payout ratio, however, has increased from 32% in 2002 to 53% currently.
Sysco's relative PE to the S&P 500 is at a level of .9 highlighted by the red arrow in the chart below. This is a clear sign that the market is discounting the slowdown in the recent earnings growth.
The chart below is a plot of the PE and yield of the shares over the previous 30 years. The PE is 13, which is close to the low PE recorded at the major bear market bottom in the early 80's. The current yield is 4%, which nearly matches the high yield of the 2009 major bear market bottom. Here again, we see the shares have largely discounted the slowdown in recent lackluster earning per share growth.
Technical Picture: Sysco shares are in a short downtrend with a series of both lower highs and lows. Recent action has left the shares oversold so a short term pop may occur.
Sysco Daily Chart
The longer term monthly charts shows the shares largely range bound between the mid to upper 20's to the mid to high 30's. The longer trend is considered neutral with strong support in the 21-23 zone.
Sysco Weekly Chart
Conclusion: With a maturing restaurant industry combined with a slow economic recovery the earnings of Sysco have slowed from historic growth. The company is engaged in updating operations to cut costs and enhance earnings. Estimated consensus earnings however continue to point to continued growth but not at higher historical trends. The valuation levels of the shares, in both PE and yield, are at record points signaling good valuation while the current yield of 4% rewards investors betting on an economic recovery. Investors should use market weakness to scale into positions with an initial entry at current levels ($25.45).
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SYY over the next 72 hours.
Sysco: Bringing Value And A 4% Yield To The Dividend Investor
Oct 7 2011, 04:14 | about: SYY