Over the year, major market indices have been rising by nearly 15%. At the end of the first quarter, many corporate earnings have reached record levels and their dividends have grown accordingly. For dividend growth investors, my goal is to point-out stocks with increasing profits and growing dividends combined with increasing payouts, at favorable valuations. I think SYSCO Corporation (NYSE:SYY) meets this criteria.
Sysco distributes a line of fresh, frozen and canned goods along with beverage and specialty items for consumption. The corporation has a 17.5% share in the food-service distributor market worth $225 billion, catering to 0.4 million customers in various industries. It has also expanded into other profitable niches like education, healthcare, and lodging. Food distribution is a low-margin, capital-intensive business, but SYSCO Corporation (NYSE:SYY) consistently manages to return on invested capital by exceeding estimates.
Sysco has been consistently increasing its dividends over the years. The company has an established history of paying dividends. At present, SYSCO Corporation (NYSE:SYY) offers a quarterly dividend of $0.28 per share, yielding 3.13%. The company paid dividends of $1.08 per share for the fiscal 2012. In the past 10 years, the company has been able to enlarge its dividends by 154.5%. In TTM, its payout ratio based on dividends stands at 63.7%. In the last five years, it has been continually able to enlarge its payout ratio. Let us dig into its financial position to analyze its ability to sustain dividends.
Sysco’s financial position is consistently stable. The company has been showing a smart investment strategy combined with strong management. SYSCO Corporation (NYSE:SYY) is well-known for its timely and perfect delivery of orders. Its strategy of competitive pricing and close contact with customers enable it to maintain and grow its market share. Sysco also invests heavily to gain customer satisfaction. In the past three years, it has invested $1.9 billion in technology, delivery ﬂeet and capital asset enhancements.
Its top-line growth is solid. At the end of the recent quarter, its revenue increased by 4% to $10.9 billion. However, the company was not able to convert high revenue growth into massive profits. At the end of the third quarter, SYSCO Corporation (NYSE:SYY)’s operating earnings declined by 23.2% to $337 million. The company’s margins condensed mainly due to a depressed economy which induced cost-pull inflation. As a result, its cost of production increased by 2.4%.