Sysco Corporation, through its subsidiaries, markets and distributes a range of food and related products primarily for food service industry. It distributes frozen foods, non-food items, restaurant equipment and cleaning supplies. It serves restaurants, hospitals and nursing homes, schools and colleges, and hotels and motels.

**Trend Analysis**

This section measures the trends for past 10 years of corporation’s revenue and profitability. The parameters should show consistent growth trends. The worksheet is at SYY stock analysis.

- Revenue: Increasing trend in revenue with average growth of 9.4% (3.4% standard deviation). Immediate past five years show reducing trend of growth rates from low teens to high single digits. This is sign of slow down in growth rates.
- Cash Flow and Income from operations: The operating income trend is relatively increasing with average growth rate of 12.6% (9.4%). The company did face some challenges in 2004 to 2006 time period.
- EPS from continuing operation: In general, the EPS also has an increasing tread (with a blip in 2006) with average growth rate as 14.7% (10.2%).
- Dividend per share: Dividends per share are consistently growing for the last 10 years.

**Risk Parameter Calculation**

Here I use the corporation’s financial health to assign a risk number for measuring risk-to-dividends. I have discussed this in more detail at Dividend Tree. This is calculated as arithmetic average based on price, yield, EPS growth rate, payout factor, gross margin, operating margin, and financial leverage. The risk number for risk-to-dividends is 1.86. This is a medium risk category as per my 3-point risk scale. An increasing payout factor and historically high yield is making SYY dividend as a medium risk.

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**Quality of Dividends**

This section measures the dividend growth rate, duration of growth, consistency over a period of past ten years.

- Dividend growth rate: The average dividend growth (18.9%) is higher than average EPS (14.7%) growth rate. In general, the corporation’s EPS is also consistent when compared to dividends per share. This is a good aspect.
- Duration of dividend growth: Dividends have continuously grown for the last 38 years.
- 4 year rolling dividend growth rate for past ten years: It is more than 10% on 4 year rolling basis. This is a good aspect.
- Payout factor: Historically. it has been less than 50%. However, the trend is showing that payout factor has been increasing from low 30s to now close to 50s.
- Dividend cash flow vs. income from MMA: Here, I analyze how the dividend cash flow stacks up against the income from FDIC insured money market account. The baseline assumption is (a) stock is yielding 4.4%; and (b) MMA yield is 3.4%. Considering historical average growth rate of 18.9%, the stocks dividend cash flow at the end of 10 years is 4.55 times MMA income. If we assume my average expected growth rate of 9.4%, then the dividend cash flow is 2.15 times MMA income.

**Fair Value Calculation**

This section determines what price I should pay to buy a given stock

- Net present value (NPV) price based on 20 year DCF: $18.21
- Average high yield price calculated based on past 10 years: $40.1
- Pricing based on past 10 year relative price-to-earnings ratio. $41.5
- Pricing based on price-to-earnings ratio of 12: $19.0
- Graham number: $15.10

The range of fair value is calculated as $20.3 to $26.7. This determined by taking average (for high value) of above five parameters and then subtracting it with half the standard deviation (for low value).

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**Qualitative Analysis**

The strength of SYY is its well established distribution network and existing leadership position. Putting this in context of economic environment, it has opportunity to grow due to its pricing ability and leveraging existing distribution network. In addition, the commodity prices have also cooled down. At the same time, the revenues are likely to be under pressure. It’s largest customer base is restaurant industry which is expected to have a slow down.

- This quantitative analysis shows that, so far, SYY has been able to maintain its historically consistent profitability. The revenues and operating incomes are under pressure and expected to continue for next few years. It appears that in last few years, the dividend growth is coming from the combination of payout factor and growth in EPS.
- In next 3 to 5 years, the flexibility in payout factor, stable profitability, and slow EPS growth provides room for maintaining the consistency is dividend.
- Assuming that the corporation’s existing trends in profitability and growth continue ‘as is’, I expect dividend growth to slow down relative to its historical growth. Therefore, with next 8 to 10 year horizon, my average expected dividend growth will be 9.4% with standard deviation of 3.4% (this is equal to the average growth in revenue).

**Conclusion**

The company raised its annual dividend for 2009 from $0.88 to $0.96 per share. The stocks risk-to-dividend number is 1.86 (medium risk category). In addition, the dividend cash flow is also 2.15 times the MMA income based my expected dividend growth of 9.4%. I will continue to hold my existing position. The existing price within my fair value range. I will add to my position, as long as my allocation allows.

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