Dividend Aristocrats: Time to Buy Sysco?

Source: Sysco.

Dividend stocks never fall out of favor with smart investors and, lately, the income they provide has given cash-hungry investors a way to pull more money from their portfolios. When you look at some of the top dividend stocks, you'll find Sysco (SYY -0.15%) among their ranks, in part because the food-distribution company qualifies among the elite group of Dividend Aristocrats. In order to be a member of the Dividend Aristocrats, a company has to make annual dividend increases for 25 straight years or more, and that requirement narrows down the universe of thousands of stocks to just a few dozen.

Sysco isn't a name that most Americans see regularly, as you won't generally find its products on grocery store shelves. But when you see food preparation at restaurants, hotels and convention centers, campus dining halls, and hospitals, you'll find Sysco products playing a vital role in helping its customers meet their obligations to the people who depend on them for high-quality food. Below, we'll take a closer look at Sysco.

Dividend Stats on Sysco

Source: Yahoo! Finance. Last increase refers to ex-dividend date.

How Sysco profits from never-ending demand
The nice thing about the food industry is that people always need to eat. Handling the logistics of getting food from rural farm areas to the cities where demand is highest involves major challenges. However, it offers Sysco the chance to act as an intermediary that connects the suppliers it relies on for raw ingredients with the institutional and commercial end users that prepare the food for diners to eat.

According to the International Foodservice Distributors Association, total industry sales of $235 billion show the scope of the network necessary to get food from where it's grown to where it's eaten. With revenue expected to approach $50 billion in the current fiscal year, Sysco has a large market share of the industry; but it also still has room to go up against competitors to increase its footprint in food distribution.

As a result of that dominance, Sysco is quite profitable, and it has been good about sharing its profits with investors. The company's dividends have more than doubled in the past decade and, longer term, Sysco has produced even more impressive dividend growth.

SYY Dividend data by YCharts.

Since the financial crisis, though, Sysco's dividend growth has slowed. After developing a reputation for double-digit percentage increases throughout the early and mid-2000s, Sysco has kept its increases to $0.01 per share on a quarterly basis since 2009.

Can Sysco still grow?
One problem that Sysco faces is finding new ways to generate growth. Some of the challenges come from changing appetites among U.S. consumers. Although those pressures have hit more consumer-facing companies like ConAgra (CAG 1.32%) more strongly, Sysco has nevertheless seen pressure to its earnings growth. In its search for growth, Sysco has looked increasingly at acquisitions, and its $3.5 billion takeover of privately held U.S. Foods represented just the latest in a series of mostly smaller buyouts aimed at consolidating a deeply fragmented industry into a more integrated national network.

Source: Sysco.

Nevertheless, investors have high hopes that Sysco will use its position as an industry leader to find new opportunities. With expectations for earnings growth of around 7% to 8% both this fiscal year and next, Sysco hopes to find new sources of revenue, and increased efficiency to improve its bottom line.

Why Sysco needs more opportunities
Dividend investors need to keep an eye on Sysco's efforts to boost its earnings, however, because the company's current earnings payout ratio is relatively high. With Sysco paying out more than $0.70 in dividends for every $1 in earnings, its ability to make larger dividend payments could suffer if it can't produce the earnings growth investors currently expect. Still, the ratio isn't high enough to have immediate concerns about an end to its dividend-increase streak.

Sysco will likely remain a Dividend Aristocrat for the foreseeable future. Until it better establishes its growth strategy going forward, though, Sysco isn't the first place to direct new money for investment.