For dividend growth investors, there are few better places to look than the Dividend Aristocrats, an exclusive list compiled by Standard & Poor's that includes companies that have raised their dividends for at least 25 years in a row.
The list includes very investment-worthy stocks that truly deserve their reputations as world-class dividend growth stocks, but there are also a few companies on the list that are not performing as well as their Dividend Aristocrat peers. These companies are well past their glory days, and manage only meager dividend raises each year.
I'd argue that food distributor giant Sysco Corporation (SYY +0.99%) is a Dividend Aristocrat whose stock investors shouldn't buy.
Not all Dividend Aristocrats are created equal
Sysco has paid a cash dividend since its incorporation as a public company in 1970, and has increased its dividend 46 times during that period. In its early days, Sysco was a high-growth company. Since its formation, Sysco grew from $115 million in annual sales to $46 billion in sales last fiscal year.
But recently, Sysco's growth has slowed down. Fiscal 2014 sales grew 4%, but diluted earnings per share fell 5% year over year. During the first three quarters of the company's current fiscal year, diluted EPS declined 10% from the same period a year ago.
The reason Sysco's profits are declining is because the U.S. food-distribution industry has become highly saturated. In Sysco's most recent 10-K filing with the SEC, the company details intense industry competition as a key risk factor. In fact, Sysco estimates there are more than 15,000 companies engaged in the distribution of food and non-food products to the food service industry in the United States.
The extremely competitive food service market means it's hard for Sysco to grow earnings. This, in turn, makes it difficult for the company to grow its dividend. Looking back at Sysco's recent dividend history, the company only managed to increase its quarterly dividend by $0.01 per share for the last six raises. In the past five years, Sysco increased its dividend by just 3% per year, which barely beats inflation.
A better food and beverage stock
Sysco stock yields 3.3%, but offers weak dividend growth prospects. Investors could easily find a higher-growth dividend stock, even within the food and beverage industry. I'd suggest investors take a pass on Sysco and instead buy PepsiCo (PEP 0.17%). That's because PepsiCo has a key advantage over Sysco: the benefit of international growth. In fact, 49% of PepsiCo's revenue last year came from outside the United States.
Revenue in international markets, particularly in emerging economies, is growing faster than PepsiCo's U.S. business. Organic revenue, which excludes foreign exchange fluctuations, grew 3% for Frito-Lay North America and 2% for PepsiCo's Americas Beverage businesses last quarter, year over year. By comparison, organic revenue grew 5% last quarter in Asia, the Middle East, and Africa, and 18% in the Latin America Foods division. International growth was a major reason PepsiCo's overall organic revenue grew 4% last quarter, after 4% organic growth last year.
After reporting first-quarter earnings, PepsiCo raised its dividend for the 43rd consecutive year and delivered a 7% dividend increase to investors. Including this raise, PepsiCo's five-year compound annual dividend growth stands at approximately 8%, which is nearly triple Sysco's dividend growth rate in the same period.
PepsiCo's dividend clocks in at a 2.9% yield, which is slightly below Sysco's current dividend yield. But going forward, PepsiCo can easily close this gap, and eventually pass Sysco, because of its significantly higher dividend growth.
Both Sysco and PepsiCo are Dividend Aristocrats, but one is more deserving of investors' capital than the other.
