Company Description: Sysco Corporation is a large distributor of food and related products, primarily to the foodservice or food-away-from-home industry.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value (see page 2 of the linked PDF for a detailed description):
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
SYY is trading at a premium to all four valuations above. The stock is trading at a 30.2% premium to its calculated fair value of $25.87. SYY did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics (see page 2 of the linked PDF for a detailed description):
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
SYY earned two Stars in this section for 2.) and 3.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. SYY earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1970 and has increased its dividend payments for 42 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section (see page 2 of the linked PDF for a detailed description):
1. NPV MMA Diff.
2. Years to > MMA
SYY earned a Star in this section for its NPV MMA Diff. of the $567. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as SYY has. The stock's current yield of 3.3% exceeds the 2.71% estimated 20-year average MMA rate.
Memberships and Peers: SYY is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company’s peer group includes: Nash Finch Co. (NAFC) with a 3.0% yield, Spartan Stores Inc. (SPTN) with a 1.9% yield, and United Natural Foods Inc. (UNFI) with a 0.0% yield.
Conclusion: SYY did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks SYY as a 3-Star Hold stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $35.18 before SYY's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 42 years of consecutive dividend increases. At that price the stock would yield 3.2%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 3.3%. This dividend growth rate is lower than the 3.7% used in this analysis, thus providing a slight margin of safety. SYY has a risk rating of 1.75 which classifies it as a Medium risk stock.
SYY operates in a relatively stable industry and has the largest market share in the United States and Canada. Over the last 40 years ago, SYY has developed an extensive distribution network serving 400,000 customers in various industries that no other competitor has been able to replicate. SYY consults with its customers on how they can drive sales and minimize costs.
Near-term, relatively high levels of unemployment will likely to limit growth in what consumers spend at restaurants. Over time, the company's profitability should benefit from consolidation of purchasing, regional distribution centers and tighter management of freight and inventory.
SYY is trading above my fair value price of $25.87, but that is not what is keeping me from buying. At 90% (down from 104$ in the last review), its free cash flow payout is well above my acceptable level. The company has improved its FCF payout over the last several quarters. However, I will wait until this number comes down to a more reasonable level before adding to my position.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in SYY (1.5% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
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