Food for profits

Sysco's cost-cutting pushes its operating margin to its highest level in a decade.

By Jim J. Jubak Feb 18, 2010 4:39PM

Jim JubakOn Feb. 1, Sysco (SYY) reported earnings of 45 cents a share for the company's fiscal second quarter. That was 3 cents a share above Wall Street projections. 


Revenue for the three months that ended in December 2009 was $8.87 billion, roughly matching analysts' expectations for $8.83 billion.


The most encouraging news in my opinion came on operating margins. Second-quarter revenue fell by 3.1% from the year-earlier period, showing that the company and the economy aren't yet out of the woods. 


But the company's efforts to wring costs out of its distribution system paid off. Operating margin expanded by 0.6 percentage points in the quarter to 5.2%.


That matches the highest annual margin the company has recorded in any of the last 10 years. That bodes well for earnings and earnings growth as the U.S. economy picks up steam.


Higher revenue at a higher operating margin would give an extra boost to earnings, and the company's continued cost-cutting should lead to gains in market share as it takes business from less efficient food service companies or buys them outright.


Food service is still a very fragmented industry: Sysco is the biggest player by far at 15% market share. (The number two company has a 10% share and the third largest just 3%.)


The company's board of directors seems to have faith in that scenario. Sysco raised its quarterly dividend by a penny a share (a 4% increase) to 25 cents, payable to shareholders of record on Dec. 31, 2009.


(I added these shares to the Dividend Income portfolio on December 8, 2009. For a completely different kind of dividend income play, see my post.)


At an annual rate of $1 a year, Sysco paid a yield of 3.52% as of Thursday.


At the time of this writing, Jim Jubak didn't own shares of any stock mentioned in this post. 
 

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