Sysco

Dividend King on SALE

The situation in the global financial markets is starting to calm down again. The S&P 500 climbed around 12 percent in the last week alone. The VIX volatility index has also dropped significantly again, and even the Fear & Greed Index shows that the panic is over. But was that it? Honestly, I'm not sure. My gut feeling tells me it wasn't over yet. The first quarterly results are coming soon, and it'll be interesting to see how investors react to them. Has everything already been priced into the stock or not? Without a doubt, it remains an exciting time.

For investors with a short investment horizon, I would recommend waiting for now. For investors who can invest their money for the long term, on the other hand, there are still great entry opportunities. For this reason, today I'd like to introduce one of the world's largest food distributors: Sysco Corporation. The stock is currently available at an attractive discount.

The Origins and Business Model of Sysco Corp.

John F. Baugh was born near Waco, Texas, on February 29, 1916. His parents ran a ranch where John, of course, also had to help out. He grew up during a time of economic depression, when money was always tight. So at the age of just 13, alongside school, he had to work as a stock clerk in a local A&P grocery store. His tasks consisted of hauling boxes, stocking shelves, and cleaning windows and sweeping floors. But that didn't bother him at all - he actually enjoyed the work. The ambitious boy worked his way up step by step until he finally became manager of the store. Shortly after the end of World War II, in 1946 to be exact, he finally made the decision to go into business for himself together with his wife Eula Mae. Together they founded the company Zero Foods Company of Houston and began selling and distributing frozen peaches and strawberries to bakeries, cafeterias, and hospitals.

Back then, John took care of the deliveries and his wife kept the books. Little by little, the two expanded their product range and were thus able to steadily grow their customer base. Soon they were supplying restaurants, hotels, schools, fast-food chains, and grocery stores with their frozen food. Business was booming; they were able to hire more staff and build new warehouses. But John wasn't satisfied yet - he had bigger plans. He recognized a problem he wanted to solve: Women who had to enter the workforce during World War II kept working even after the war ended. They therefore had less time to cook and increasingly had to rely on serving their families ready-made meals. In addition, he read an industry study stating that by the year 2000, half of all meals would be eaten away from home. Baugh was convinced that there had to be a nationwide food distributor that would take care of all these issues. But he was also aware that he couldn't carry out this plan alone. So in 1969, Baugh convinced the owners of 8 other small food distributors to merge their companies and form a national food service distribution organization. The SYSCO Corporation was born. The name is an acronym for "Systems & Services Company".

In its founding year, it already generated total sales of 115 million US dollars. A year later, Sysco went public and at the same time announced its first acquisition: Arrow Food Distributor. This company was the first in a long series of carefully selected, geographically chosen distribution companies that Sysco was able to buy up. Baugh was able to achieve his goal of offering customers across the country uniform and excellent service. During the 1970s, a lot of money had to be invested in building new warehouses and buying an entire fleet of multi-temperature refrigerated trucks. Without these investments, the company probably wouldn't have been able to keep up with its rapid expansion. Of course, these and many other investments quickly paid off, and the company was able to keep growing. Even today, Sysco is still growing both by expanding its business segments and through lucrative acquisitions. In 2015, the antitrust authorities feared that the planned merger with US Foods would create a monopoly and ultimately blocked it. No reason for Sysco to hit the brakes: From then on, it simply went shopping in Europe. For example, the British delivery specialist Brakes, which is also present in France, Sweden, Spain, and Belgium, among others. So Sysco runs a boring but fast-growing business model.

What's Next for Sysco?

Even though the share price looks pretty beaten down at the moment, I'm still optimistic about Sysco's future. The true "delivery hero" is extremely broadly positioned: 69,000 employees in 330 distribution centers supply their more than 650,000 customers with food, various services, and restaurant equipment using their 14,000 trucks. Those are numbers that are truly impressive - so it's no wonder that Sysco is the market leader in its industry. A key advantage over many competitors is price. Sysco has worked for decades to optimize its distribution network. The delivery fleet can be used as efficiently as possible - there are hardly any unnecessary and expensive empty runs. Smaller distributors can only dream of that.

As in the past, Sysco will continue to grow in the future by picking out suitable takeover candidates and then integrating them into its own logistics and distribution network. For example, Sysco recently acquired J & M Wholesale Meats and Imperio Foods. Both companies focused on Hispanic foods. Quite a smart move when you consider how many Americans have Hispanic roots. According to estimates, around 130 million Latinos will live in the USA by 2050, which would mean a doubling compared to today. Most recently, J. Kings Food Service also landed in Sysco's shopping cart, which is now supposed to strengthen the distribution network in the New York area.

But the company doesn't just want to keep growing in the USA, but also in Europe and especially in Germany. That would fit the pattern, after all, more and more Germans are eating out, and many hardly cook for themselves at all anymore. And the fewer people cook for themselves, the more meals have to be provided in restaurants, daycare centers, schools, cafeterias, and nursing homes. Recently there were talks between Sysco and the Metro Group. However, there's still no takeover offer to this day - let's see what the future holds here ...

All Right, But Then Why the Stock Plunge?

I can't even properly show the full extent of the crash in the long-term chart above. On March 18, 2020, the stock hit its low at under $26! If you had bought at the peak a few weeks earlier, that would be a 70 percent loss. Now that's what I call panic - because let's be honest: people always have to eat, and Sysco is in great shape! In my eyes, this price drop was more than exaggerated. Of course, Sysco is suffering from the Corona crisis. Many customers had to shut down their businesses. Restaurants, universities, daycare centers, and schools have closed, and stay-at-home orders aren't exactly generating sales either. So it's logical that Sysco is seeing a drop in revenue. But that won't last. The facilities will reopen, and people will eat there again. Investors quickly understood that too, which is why the stock has risen 90% again from its low to today. If only you had gotten in early ... But maybe the lows will be tested again, who knows :-)

Can the Dividend Continue to Be Paid and Increased?

There's never a guarantee, but Sysco has proven many times that it can handle crises well. The Dividend King has been paying a dividend to its shareholders ever since its IPO in 1970. Since then, it has also always been raised every year. The dividend growth rate over the last 10 years is "only" 5.8% - but over the last 5 years it's at least 8.1%. Currently, you can lock in a dividend yield of 3.4%. The payout ratio, at 48%, is also still in the green zone. Enough money remains in the company to keep growing.

Conclusion:
The food distributor Sysco has developed extremely well over the years - from a small peach supplier to an all-in-one partner for the food and restaurant industry. With its optimized distribution network, it can deliver low prices and still high quality. When it comes to the dividend, too, it demonstrates quality and a will to grow. Yield-hungry investors are in good hands here.