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 37.5% premium to its calculated fair value of $26.26. 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 43 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
The NPV MMA Diff. of the $282 is below the $500 target I look for in a stock that has increased dividends as long as SYY has. If SYY grows its dividend at 3.6% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 3.41%. SYY earned a check for the Key Metric 'Years to >MMA' since its 3 years is less than the 5 year target.
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: G. Willi Food-International Ltd. (WILC) with a 0.0% yield, Spartan Stores Inc. (SPTN) with a 1.5% 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 did not earn any Stars in the Dividend Income vs. MMA section for a total of two Stars. This quantitatively ranks SYY as a 2-Star Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $31.32 before SYY's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 43 years of consecutive dividend increases. At that price the stock would yield 3.7%.
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 5.1%. This dividend growth rate is lower than the 3.6% used in this analysis, thus providing no 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 that no other competitor has been able to replicate. SYY consults with its customers on how they can drive sales and minimize costs.
In December 2013, SYY agreed to acquire US Foods for $8.2 billion. U.S. Foods is the second largest food distributor in the U.S. The combined company should gain significant synergies in purchasing power, supply chain efficiencies and the overhead consolidation. Also, the refinancing of US Foods $4.2 billion debt could boost the combined EPS.
SYY is trading above my fair value price of $26.26. In addition, its free cash flow payout of 70% (down from 90% in the last review) is above my maximum level. The company has improved its FCF payout over the last several quarters. I will continue to wait until the SYY's dividend fundamentals improve 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 (1.4% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
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Tags: [SYY] [WILC] [SPTN] [UNFI]
