Setting the table for dividends

Sysco raises its dividend and aptly handles the downturn in the food-supply business.

By Jim J. Jubak Dec 8, 2009 2:27PM

Jim JubakI'm adding food distributor Sysco (SYY) to the Jubak Dividend Income Portfolio with this post. 


The yield isn't terribly exciting, I'll admit, at 3.5% but it is still a bit better than you can get on a 10-year Treasury note right now. And I think the total return -- that's dividends plus capital appreciation -- has the potential to top 25% in 12 months. (This buy also helps diversify this portfolio.)


The company recently raised its quarterly dividend -- just a penny, to be sure -- to 25 cents, but I think that's a sign that Sysco sees better sales ahead with an end to the recession, if not a return to robust economic growth. (Sysco's cost cutting and its leading market share potentially make it one of the lean, mean earnings machines I described in strategy #3 of this post.)


How has Sysco weathered the recession? In good shape, I'd say.


Sysco has been relatively successful in negotiating the slowdown in its core restaurant food-supply business. Total company sales in the fiscal year that ended in June fell just 1.8%. 


The company has made a big effort in recent years to streamline its distribution system and increase productivity, and that paid off -- even in the recession -- with operating margins increasing slightly in fiscal 2009 and again in the quarter that ended September 2009.


I think a slower-than-expected economic recovery in 2010 will actually work to the company's long-term advantage. 


Sysco operates in a very fragmented industry. The company is the largest food service distributor in the United States, but Sysco has just 15% of what is estimated as a $200 billion to $300 billion market. Its largest competitor, U.S. Foodservice, has a 10% share, and the number three company controls just 3%. 


Sysco has doubled its cash position to $850 million over the last year, and the company is in good shape to acquire smaller competitors if they falter in a slow-growth recovery. The company has made 150 acquisitions in its 40-year history. 


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

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