Update Sysco (SYY)
On February 1 Sysco (SYY) reported earnings of 45 cents a share for the company’s fiscal second quarter. That was 3 cents a share above Wall Street projections. Revenue for the three months that ended in December 2009 was $8.87 billion, roughly matching analyst 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 10 years. That bodes well for earnings and earnings growth as the U.S. 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 out right. Food service is still a very fragmented industry: Sysco is the biggest player by far at 15% market share. (The No. 2 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.)
At an annual rate of $1.00 a year, Sysco paid a yield of 3.52% as of February 18.
Update Verizon (VZ)
When Verizon (VZ) reported fourth quarter earnings on January 26, everything was in line. There were no real surprises. And that was disappointing to investors who were looking for signs that a rising economy was lifting margins in Verizon’s legacy landline business or who were hoping for some sign that Apple (AAPL) was going to strike a deal with Verizon to sell the iPhone.
Didn’t happen.
So investors are stuck with the same old story. Which fortunately is pretty good despite its lack of surprises.
Update du Pont (DD)
On January 26 E.I. du Pont de Nemours (DD), known as du Pont to its friends, announced fourth quarter earnings of 44 cents a share, beating Wall Street projections by 3 cents a share. Revenues climbed 10.3% year to year to $6.42 billion. Wall Street analysts had been expecting $6.16 billion.
Sales volumes for all regions of the world were up 10% and sales in the Asia/Pacific region climbed 34% by volume from the fourth quarter of 2008 on strong demand from China, Japan, Korea, and India. Asia/Pacific sales now exceed pre-recession volumes. For more on why this point in the economic cycle is so good for industrial stocks see my post http://jubakpicks.com/2010/01/26/for-after-the-correction-think-industrial-stocks-market-history-says-this-is-their-time/ )
Buy American Electric Power (AEP)
With this post I’m buying American Electric Power (AEP) for my Dividend Income Portfolio. I think a modestly better economy in 2010 will increase company sales, profits, and cash flow enough to increase the dividend in 2010. (The yield is now 4.7%.) That will give income investors some protection against rising interest rates in 2010. The company certainly has room to raise the dividend since the current payout ratio is only around 60%. That’s low for a utility. (The payout ratio is the percentage of a company’s profits that are paid out to shareholders in dividends.)
In 2010 I’m looking for a big pick up in the company’s sales of electricity to industrial customers in its core Mid-West service area on a pickup in U.S. manufacturing that is, tentatively I’d admit, now under way, and in the company’s sale of out of system power to other utilities.
New rules for investing in utilities–the risks and rewards are up
Utility stocks trade at a discount to the stock market as a whole. And at a bigger discount than usual. The forward price-to-earnings ratio based on projected earnings for the next twelve months is just 80% of the forward P/E ratio for the market as a whole. The long-run average is 85%.
Yet I don’t think the sector as a whole is a roaring buy. In fact, I think the average utility stock is over-priced.
So how can the sector be cheaper than the long-term average and over-priced at the same time? Because uncertainty and risk for the sector as a whole has soared. To find a utility stock to buy—and I’ll give you three suggestions (including one buy) at the end of this post—I think you need to find shares of those few utilities that have navigated a clear course around those risks or that have lucked into a way to avoid the worst risks.
What are the risks? You don’t need to take off your shoes to count ‘em. Two hands will do. (Or one if you’re Anne Boleyn.)
