Sysco Corporation (SYS), 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.

SYS is a member of Broad Dividend Achievers and has been raising dividends for last 38 years. The most recent dividend increase was in December 2008. It remains to be seen if it will increase dividends later this year. I had reviewed this stock in February 2008 which at that time was a medium risk to dividend. My objective here is to analyze if SYY still continues to be a good dividend growth stock.

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 image below shows the trend chart.

• 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: The cash flow is remaining flat in 2008 to 2009 with minor reduction. Free cash flow is almost equal to net income. The good aspect is that it continues to generate operating cash flow.
• EPS from continuing operation: In general, the EPS also has an increasing tread (with a blip in 2006 and 2009) with average growth rate as 13.2% (11.1%).
• 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. The risk number for risk-to-dividends is 2.00. This is a medium risk category as per my 3-point risk scale. An increasing payout factor, historically high yield, negative EPS growth makes SYY dividend as a medium risk.

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 (17.9%) is higher than average EPS (13.2%) growth rate. The flexibility in payout factor and share buybacks allowed this difference. However, on a longer term basis this is not sustainable.
• Duration of dividend growth: Dividends have continuously grown for the last 37 years.
• 4 year rolling dividend growth rate for past ten years: Close to 10% on 4 year rolling basis.
• Payout factor: Historically, it has been less than 50%. However, the trend is showing that payout factor has been increasing from low 30% to now more than 50%.
• 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 3.9%; 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 4.0 times MMA income. If we assume my average expected growth rate of 6.4%, then the dividend cash flow is 1.5 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 $26.8.

Qualitative Analysis
The strength of SYY is its well established distribution network and existing leadership position. In context of ongoing economic environment, it has opportunity to grow due to its pricing ability and leveraging existing distribution network.

• This quantitative analysis shows that, so far, SYS has been able to maintain its historically consistent profitability. It appears that in last few years, the dividend growth is coming from the combination of payout factor and growth in EPS.
• The flexibility in payout factor, stable profitability, and slow EPS growth provides room for maintaining the consistency is dividend.
• The revenues are likely to be under pressure. It’s largest customer base is restaurant industry which is expected to have a slow down.
• Meanwhile, SYS continues to adapt with new initiatives around its core competency.

Conclusion
SYS is an enviable position with largest market share in its market segment. A hallmark of a good company like SYS is that it is always evolving to remain competitive. With negative growth in 2009, it remains to be seen whether management will raise its dividends. The flexibility in payout factor should allow the increase in dividends. The stocks risk-to-dividend number is 2.00 (medium risk category). The stock’s price is within my buy range. I would continue to hold on to my existing position, and wait for dividend increase decision.

Full Disclosure: Long on SYS

This article was originally published on The DIV-Net on September 24, 2009.