Legend has it that in the California gold rush, the people who made the most money weren't the prospectors, but rather those who sold them their picks and shovels. In a roundabout way, that story has stuck with investors for generations. These days, it's interpreted to mean that companies that provide the back-end infrastructure for other businesses are the ones making real money for investors.
To give you an idea of the size of its business, in its 2005 annual report, the company claimed there were some 900,000 "customer purchasing points" throughout North America. Of that list, about 390,000 represented SYSCO customers. That's a substantial fraction of the overall market, and it gives the company tremendous leverage. It's such a large player that only one customer, Wendy's
The benefits of size
As the dominant firm in its line of work, SYSCO is often the first name new companies think of when looking at food-service needs. That helps in bringing in new business. Plus, with its customer base so segmented by business line and region, the firm is likely to easily survive a localized economic downturn or even a serious nationwide recession. After all, people are still going to eat no matter what the economy, and schools and health-care establishments don't tend to close their doors just because a recession hits.
SYSCO's size lets it do something its competitors, such as U.S. Foodservice -- a division of Ahold
That dividend is also a key reason why I own shares in the company. As SYSCO has grown, it has started investing in significant enhancements -- notably regional distribution centers -- to more effectively meet its customers' needs. While those centers will likely help it further cement its dominance, their significant development costs are affecting its bottom line today. Management has not only maintained the dividend throughout the expansion, but has regularly raised it as well.
No rational company would raise its dividend if its business were in imminent jeopardy. The executives who control the dividend policy have a lot more to lose in a corporate bankruptcy than they stand to gain with a mere couple of pennies-a-share hike in the payment. The current per-share dividend is about 13% above last year's, which in turn was 15% above the previous year's.
Dividend growth like that, in the face of an expensive expansion plan, speaks volumes for the financial strength and long-run stability of the company. That strength is echoed in the exceptionally solid balance sheet, which touts far more in tangible assets than total liabilities.
What's not to love?
With SYSCO, you have a company that is:
- A leader in its industry
- Absolutely essential to its customers' successes
- Expanding to meet future needs
- Financially solid
- Committed to paying its shareholders for their financial risks
With a profile like that, it certainly deserves consideration as a potential investment. I suspect very few Income Investor subscribers lose sleep over owning their small slices of this excellent business.