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Sysco Corporation (NYSE:SYY) is the largest publicly traded food service distribution company in the United States. It provides fresh and frozen foods to restaurants, hospitals, hotels, and schools through a network of 185 distribution facilities in the United States, Canada and Ireland. The company also provides non-food items such as paper products, utensils and cookware to the restaurant industry as well as personal care and cleaning items to the lodging industry. Sysco clients benefit from corporate partnerships and marketing support. Sysco Corporation was founded in 1969 and has its corporate headquarters in Houston, Texas.

The Sysco investment theme is a story about scale. There is Sysco…the giant in the industry with a 17.5 share of $191B market in the United States…and then there is everybody else as the remainder of the market is fragmented by a multitude of private, smaller distributors. The 17.5 market share gives Sysco plenty of headroom to grow. The market for the United States and Canada combined is $225B

An additional note about scale: Sysco provides over 400,000 products…40,000 are higher-margin Sysco branded products.

Growth by Acquisition:

For years Sysco has built its footprint across North America by purchasing smaller rivals and expanding into new markets. Its latest move is the announcement this week (week of October 22, 2012) that Sysco is purchasing Distagro, a division of Canadian grocery retailer Metro Richelieu, which brings 4 the number of Canadian food service acquisitions in the past 13 months. In addition, on October 3, 2012, Sysco closed on the food service distribution arm of Ireland-based Keelings.

Organic Growth:

A recovery is underway in the restaurant industry. According to the National Restaurant Association, 2012 will mark the third year in a row of growing restaurant revenue which bodes well for Sysco.

2009 was the last down year in total revenue when full service restaurants (-2.8%) and catering business (-5.0%) were hit particularly hard.

Results of a study by the National Restaurant Association show promise for future growth of the industry. In the study, people that identified themselves as unemployed or under-employed and therefore 'hunkered down' and not spending on non-essentials, wished to patronize restaurants more frequently. Nearly 7 out of 10 (68%) said they would eat out more often if they were financially able. This pent-up demand bodes well for the industry in general and Sysco in particular as the job outlook improves.

Restaurant revenues are significantly impacted by gains in employment, disposable income, and population. They are further impacted by increases in leisure and business travel…especially international travel to the United States. Profits are negatively impacted by increases in costs of food commodities and labor.

Year-End 2012 (June 29) Highlights:

$42.2B in sales revenue, $1.1B in net earnings.

Customer Mix:

63% restaurant

10% hospitals and nursing homes

6% hotels and motels

5% school and colleges

16% other

Sysco continues to innovate, using new technologies to touch and service customers including introducing an app for iPhone and iPad offering menu items and recipes for Sysco branded products.

The company continues to establish initiatives to reduce costs in the business including transportation efficiencies.

Dividend Track Record:

Of the S&P 500 universe, 51 companies in 2012 are dividend aristocrats according to Forbes, defined as 25 years of consistent dividend increases. On the 2012 list….Sysco

Dividends have been paid since 1970. Sysco has an enviable record of 35 years of consistent dividend increases. The 5-year average dividend growth rate is 7.38%. With a 57% dividend payout there is room to grow the dividend.

Sysco Metrics:

Market Cap

17.8B

Trailing P/E Ratio

16.0

Operating Margin

4.9

Return on Equity

23.8

Total Debt

3.02B

Source: Yahoo Finance

Conclusions:

Sysco is an appropriate selection as part of a dividend portfolio. Because of the growth strategy (organic and acquisition) this stock may also prove to benefit from a growing stock price.

As a retiree seeking growing dividend income, I invested in Sysco for the security of its dividend (paying out for 42 consecutive years), its growing dividend (35 years of consistent dividend increases) and share price growth as a play on an improving economy.

Source: Sysco, A Dividend Aristocrat On A Growth Track