Food for Profits

02/18/2010 2:49 pm EST


Jim Jubak

Founder and Editor,

On February 1, Sysco (NYSE: SYY) reported earnings of 45 cents a share for the company’s fiscal second quarter. That was three 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 ten years. That bodes well for earnings and earnings growth as the US 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 December 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 this recent post.)

At an annual rate of $1.00 a year, Sysco paid a yield of 3.52% as of February 18.

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

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