Food distributor (and Motley Fool Income Investor pick) Sysco (NYSE:SYY) reported second-quarter results yesterday. If growth continues at this clip, investors could come to count on steady earnings expansion and income from the company's 2.1% dividend yield. I'd bet more on the latter, but don't count growth prospects out just yet.
In a nutshell, Sysco posted steady 7.5% sales growth and impressive 15.2% earnings expansion, as improved profitability flowed through to the bottom line. Earnings only grew a couple of percent for the six-month period, but were reduced by an accounting charge related to life insurance policies. If you exclude recent charges and a gain in the first quarter of last year, earnings grew in the double digits.
It would be nice if that rate of growth would continue, but Sysco has only been able to increase the bottom line 7.5% annually over the past five years. Earnings growth has been even less over the past couple of years. Why? Years of rapid growth have catapulted Sysco to an industry leadership position, with nearly 400,000 customers in industries from health care to lodging to restaurants. As a result, Sysco is finding it more difficult to penetrate the market and find new customers capable of significantly affecting its operations.
With less compelling prospects for reinvesting its ample cash flow generation, Sysco has increased its dividend nearly 20% annually over the past five years. The food distribution industry is capital-intensive and has high subsequent levels of capex to maintain the business. Fortunately, Sysco still has plenty of capital to make acquisitions, pay dividends, and repurchase shares.
Management is also focusing on reducing costs to enhance profitability: Net margins for the quarter grew 20 basis points to 2.76%. And while that's not very impressive in the overall scheme of the market (the average firm in the S&P 500 posts a 13.6% net margin), it leads industry peers such as United Natural Foods (NASDAQ:UNFI) and Performance Food Group Company (NASDAQ:PFGC), which posted 1.9% and 0.8% margins, respectively, over the past 12 months.
Despite the low margins, Sysco is adept at turning over its asset base and posting market-leading returns on invested capital in excess of 20%. That number has also fallen over the years as acquisition activity has slowed, leaving less opportunity to improve efficiencies from purchased peers.
Overall, if the past five years are any indication, income-oriented investors may be able to bank on increased dividend coupons going forward. I wouldn't count on double-digit sales or earnings growth from here on out, but Sysco should continue to show glimpses of its fast-growing past.
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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.
