Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Here is last week's selection.
This week, I want to dig deeper into Sysco (NYS: SYY) and show you why it's a stock you can count on over the long run.
Nothing to balk at
To remedy the confusion upfront, the company I'm highlighting here today is the largest food distributor in the United States and is not to be confused with Cisco Systems, the networking company.
Sysco's business isn't the most glamorous, most exciting, or even the fastest growth, but delivering food is a necessity business that generates near-guaranteed cash flow in both good and bad economies. Specifically, Sysco counts restaurants, hotels, and schools in its primary base of roughly 400,000 customers.
As you can expect, not everything is perfect with Sysco, otherwise it would be on every Wall Street analysts' radar. For one, food inflation is eating into Sysco's bottom line profits. Of particular concern are the double-digit rises in meat and poultry prices, which turned an 8% rise in revenue into just a flat year-over-year profit. These concerns don't look to be abating anytime soon, with Tyson Foods (NYS: TSN) warning that prices could continue to rise because of higher raw material costs and a decrease in the availability of protein for its livestock. Similarly, Smithfield Foods (NYS: SFD) noted in its earnings report in March that pork prices should remain high thanks to the same shortage of domestic protein.
Another concern Sysco faces is that it often finds itself at the mercy of restaurant traffic. If the public isn't using its discretionary funds to eat out, then Sysco can find its margins constrained. However, in its latest quarter, Sysco grew its distribution volume by 2.3% organically, despite a slight downtick in restaurant traffic.
Why Sysco looks tasty
Now let's look at why Sysco makes a great investment and why its dividend is the cream of the crop in food distribution.
One advantage Sysco holds over its competitors is its sheer size (i.e., the aforementioned 400,000 customers). Because of its diverse selection of food products that it distributes as well as business types that it delivers to, Sysco finds itself extremely resistant to certain economic pressures that hurt most other businesses.
In comparison, Nash Finch (NAS: NAFC) , which in its defense is much smaller than Sysco, announced a 3.1% decline in comparable-store sales in its latest quarter while sales were dragged down 3.7% because of six retail locations closing. Also, United Natural Foods (NAS: UNFI) reported an 11% increase in operating expenses and a 48 basis point decrease in gross margin because of shifts in consumer habits and inventory write-offs.
Sysco is so much larger than its peers that inventory levels, and weakness from a small batch of customers, just isn't a major concern. Sysco's size also gives it significant pricing power than can be matched only by a few larger restaurant chains.
That leads me to my next point: Sysco's pricing power has led to incredibly steady margins over the past decade. Stringent cost-cutting measures coupled with measurable restructuring changes in its produce division have paid off, with steady operating margins through even the worst recession in the past 70 years. Operating margins have vacillated by only 70 basis points (4.6%-5.3%) over the past decade.
And as we've all learned throughout this weekly series, strong operating margins and predictable cash flow usually leads to a great dividend. Here's a look at Sysco's payout:
Source: Dividata. *2012 dividend assumes quarterly payout of $0.27.
Sysco's quarterly dividend growth may have slowed in the past three years, but considering that it's tripled in just the past 11 years, and that the company has raised its dividend for 41 consecutive years placing it among Wall Street's most elite dividend payers, I'm willing to cut the company some slack.
Currently yielding just shy of 4%, there are few companies in the food sector that will offer you a better yield or more steady cash flow than Sysco. It has a diverse customer base which allows it to be mostly impervious to economic weakness and with a payout ratio of just 41%, its dividend has considerable room to move higher. I'd suggest you better acquaint yourself with "the other Sysco."
If you're craving even more dividend ideas, I invite you to download a copy of our latest special report, "Secure Your Future With 9 Rock-Solid Dividend Stocks," which is loaded with income-producing companies hand-selected by our top analysts. Best of all, this report is free, so don't miss out!
At the time this article was published Fool contributor Sean Williams has no material interest in any of the companies mentioned in this article. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Cisco Systems. Motley Fool newsletter services have recommended buying shares of Sysco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy that's delivered fresh, daily!
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