Sysco (NYSE: SYY), not to be confused with the networking company Cisco Systems, is the nation's largest food distributor. Its vast food transportation network is responsible for deliveries to restaurants, hotels, and schools.
Today, let's look at three things investors should be watching regarding Sysco, as they will provide us better insight into the company.
1. Food inflation
Nothing is more important for a food distributor than rising food prices. Sysco, luckily, is the largest food distributor in the United States and, because of its sheer size, is able to carry a good assortment of product and command decent pricing power because of that size and assortment. In short, Sysco can normally pass along the rising price of its food costs and fuel transport costs to its customers.
The same can't exactly be said for its peers -- both from a direct-competitor standpoint and individual food producers. Chicken products provider Pilgrim's Pride (NYSE: PPC) noted that rising feed prices and inconsistent consumer spending could weaken its outlook in the near term. Similarly, that could bode poorly for egg producer Cal-Maine Foods (Nasdaq: CALM), which is heavily reliant on corn -- a commodity that's shooting to the moon thanks to the nationwide drought -- to feed its hens.
Therefore, understanding how food costs affect Sysco's distribution network is an important first step.
2. Consumer spending & restaurant traffic
This sort of goes hand-in-hand with food inflation, but if consumers aren't going out and spending their hard-earned money at restaurants, then Sysco's business is likely to be affected.
Last week my Foolish colleague Austin Smith took a closer look at this trend and noted that consumer spending, which grew by a paltry 1.5% in the second quarter, is barely keeping pace with overall inflation rates. That's bad news when approximately 70% of U.S. GDP is dependent on consumer spending to drive growth.
We've already seen some high-profile names go down in flames this quarter due to spending shifts and higher operating expenses. Buffalo Wild Wings (Nasdaq: BWLD) was apparently too hot for investors to handle in its most recent quarter with the chicken wing king missing Wall Street's estimates on higher chicken wing costs (related to higher corn feed prices) and its aggressive expansion plans. Even Chipotle Mexican Grill (NYSE: CMG), which had been unstoppable up until recently, succumbed to what it deemed would be second-half pricing pressures which could impede margins.
Keeping a close eye on restaurant traffic is another crucial step to understanding Sysco.
3. That delectable dividend
Sysco's business is anything but glamorous, so the final aspect to take note of is if the company can keep up its regular dividend growth. I highlighted Sysco as a great dividend company you could buy right now back in late May because of its 41-year long streak of raising its dividend and the fact that its quarterly payout has tripled in just the past 11 years.
Two factors that contribute to Sysco's success and consistent dividend growth are its sheer size and its tight expense controls. As I alluded to earlier, Sysco's size allows it to carry an assortment of products that Nash-Finch and United Natural Foods simply can't match. That means a diverse set of clients and notable pricing power for Sysco. Tight cost controls also play a large role in keeping its dividend moving in the right direction. With an operating margin range of just 70 basis points over the past decade, Sysco shareholders can feel pretty confident in predicting the amount of cash flow Sysco will bring in annually. That makes for a sustainable and steadily rising dividend -- which currently yields 3.7% by the way!
Foolish roundup
Now that you know what to watch for, it should be easier to analyze Sysco's successes and pitfalls in the future and hopefully give you a competitive investing edge.
If you're still craving even more info on Sysco, I would recommend adding the stock to your free and personalized watchlist so you can keep up on all of the latest news with the company.
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