I‘m adding Sysco (SYY) to the Jubak Dividend Income Portfolio with this post. The yield isn’t terribly exciting, I’m admit, at 3.5% but it is still a bit better than you can get on a 10-year Treasury note right now. And I think the total return—that’s dividends plus capital appreciation—has the potential to top 25% in twelve 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 largest in its industry market share potentially make it one of the lean, mean earnings machines I described in my post https://jubakpicks.com/2009/11/20/nervous-afraid-to-stay-in-but-scared-to-get-out-join-the-club-and-read-my-three-strategies-for-coping/ . You’ll find a description of that kind of stock near the end in strategy #3.)
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 spent a lot of effort in recent years streamlining its distribution system and increasing productivity and that paid off even in the recession with operating margins increasing slightly in fiscal 2009 and again in the quarter that ended in 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 to $300 billion market. Its largest competitor U.S. Foodservice has a 10% share and the No. 3 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. Â
Full disclosure: I don’t own or control shares of any company mentioned in this post.
dkchinabiker:
I have been in NLY for quite a while now (Entry is 14.07) and then averaged up with another entry at 15.14. It’s been a great stock for me along with CMO.
I also bought CYS in the 12’s shortly after IPO in anticipation for Q4 dividend announcement, although this is a higher risk REIT holding, then the likes of NLY / CMO.
As for SYY, I’d be more interested in playing the I Savings Bonds which are currently at 3.36% rather then SYY.
First I want to thank you for affirming a position I added a couple of weeks ago.
However, I think the Sysco industry share is 17%, and given the PE of 15 (which I think will rise to 17 through aquisition) and 30.62 ROE, my price target closer to $40.
Besides, my I want to be able to eat out more often, and SYY is a good start.
Jim,
I like the idea of the dividend income portfolio. I have been looking to get some returns above the treasuries. I have been looking at NMM and NLY. As far as NMM I know the shipping industry was beaten down during the previous quarters, but even with a slow recover shipping should make a slow comeback. With NLY is it too early to start into REITs? Love to here your feedback on these two.
Sysco has raised its dividend every year since going public in 1970, regardless of the economic conditions. You could actually make the argument that the fact that it ‘only’ raised its dividend by one penny for next year means that it is expecting a tough economic environment in 2010, and not a healthy recovery or an end to the recession.
I actually bought SYY back when it was trading at around $23 earlier this summer, so I don’t think it is a good stock at its current price. I would say to wait for the price to drop, as I believe it almost certainly will at some point next year, and then buy.
Maybe hes worried about the return of the dollar. International companies will suffer once the $ start to come around. Lots of room for market penetration and lots of the small guys will be out of business. My $.02
Jim,
As a retired dividend income investor, who has followed you for several years, I find your replacement choice of Sysco surprising. Though Sysco is a solid company and the 800 lb. gorilla in the food industry with a decent dividend and low risk, I think you would have had other reliable companies with a possible international exposure and a larger dividend. This is the dividend “income” portfolio !
Jim,
Without a strong economic recovery, I can’t see this stock’s price rising much, if at all. There’s more downside risk than upside in the price. However, you are right about the dividend. If I was looking for a safe stock with a decent dividend, this one would qualify.