Setting the Table for Dividends

12/08/2009 1:20 pm EST


Jim Jubak

Founder and Editor,

I‘m adding food distributor Sysco (NYSE: 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 ten-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 number three in this recent 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.

Full disclosure: I don’t own or control shares of any company mentioned in this post.

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