Sysco Corporation is an American multinational corporation involved in marketing and distributing food products, small wares, kitchen equipment, and tabletop items to restaurants, healthcare, educational facilities, lodging establishments, and other customers who prepare meals away from home. The company’s restaurant customers include everything from small family-owned businesses to large chains. In recent years, Sysco has made a concerted effort to expand its reach beyond traditional restaurants and other food service segments such as healthcare and education.
Founded in 1969 by John B. Ford and Herbert J. self, Sysco Corporation is now the world’s largest foodservice company, with a network of over 700,000 customers in more than 90 countries around the world and has nearly 71,000 employees, and generates annual revenue of more than $68 billion. Sysco is a Fortune 500 company, and its common stock is traded on the New York Stock Exchange under the ticker symbol SYY.
Business Model
Sysco’s products and services are designed to help customers save time and money while providing quality food and beverage offerings to their customers. The company offers a wide variety of food products, including fresh, frozen, and prepared foods; equipment and supplies; tabletop items; and janitorial and paper products. Appropriately 50% of products distributed by Sysco are within the fresh and frozen meats, canned and dry products & fruits, vegetables, and bakery categories. In addition to its food service offerings, Sysco also provides support services such as marketing and customer service assistance, financial planning and analysis, information technology support, and supply chain management. These services help customers optimize their operations and improve their bottom line. The company’s focus on customer service is evident in its many programs, such as culinary training, menu development assistance, new product introductions, and marketing support.
According to Sysco’s latest annual report, restaurant customers contributed 63% of Sysco’s total sales, followed by travel and leisure at around 14% and healthcare customers at 8%.
On an operation level, Sysco has four reported business segments: U.S. Foodservice Operations, International Foodservice Operations, SYGMA, and Others.
U.S. Foodservice Operations is its largest business segment, accounting for 70.69% of Sysco’s total sales. The U.S. Foodservice Operations segment offers various food and non-food products to customers in all 50 states within the United States through seven regional operating companies. This segment primarily includes U.S. Broadline operations- which distribute a full line of food products & non-food products, and U.S. Specialty operations, which include specialty meat, specialty protein, and italian specialty.
Sysco’s International Foodservice Operations account for 17.17% of Sysco’s total sales. This segment consists of its operations outside of the United States, which distributes a full line of food products and a wide variety of non-food products in Canada, Bahamas, Mexico, Costa Rica, Panama, the United Kingdom (U.K.), France, Ireland, and Sweden.
SYGMA segment accounted for 10.56% of total sales in the fiscal year 2022. SYGMA segment is Sysco’s dedicated unit that supports chain restaurants with specialized distribution services. Finally, the others segment comprises the equipment & supplies businesses and certain smaller operations primarily serving hotel customers.
Dividend Profile
As the world’s largest foodservice distributor, Sysco Corporation will likely have a long runway of opportunities, given its scale and scope to continue delivering superior results for shareholders in the long term. The company’s stock has a dividend yield of 2.68% and a payout ratio of 70.6%.
When the pandemic hit, many restaurants were forced to close their doors. This impacted Sysco significantly, as their earnings declined. As a result, their payout ratio rose above 100% for fiscal years 2020 and 2021. While not ideal, Sysco’s strong balance sheet has allowed it to maintain dividend increases even in difficult times
Since 2013 Sysco’s dividend per share has been increasing at a CAGR of 5.73%. In total, Sysco Corporation has increased its dividend for 53 consecutive years, making it a dividend king, a group of companies that have increased their dividend for at least 50 consecutive years.
Business Risks
While Sysco has a diversified customer base, restaurants remain an essential part of Sysco’s business. Not only do they account for the vast majority of the company’s sales, but they are also among the most loyal and long-standing customers. Restaurant customers also tend to be higher-margin businesses than other segments like healthcare, travel, and leisure. Therefore, any slowdown in the restaurant industry will have a significant impact on Sysco’s earnings. During The Covid-19 pandemic, Sysco was hit hard as restaurants worldwide were forced to close their doors.
Recent Challenges
The food service distribution industry is characterized by low margins and fragmented and highly competitive, with local, regional, and multi-regional distributors and specialty competitors. Any fluctuations in food prices have a direct impact on their profitability. For example, in the fiscal year, 2022, Sysco experienced an elevated inflation rate of approximately 15.0% in their U.S. Broadline operations, primarily in the paper and disposables, poultry and meat categories. During these periods of significant product cost inflation, Sysco is unable to pass on a portion of such product cost increases to their customers promptly, resulting in a decline in their operating margin. Sysco’s profit margin has fallen from 2.8% to 2% in the last five years.
Conclusion
Sysco has been paying dividends for many years and has increased its dividend payments for 53 consecutive years. The company has a strong balance sheet and generates a lot of cash flow, allowing it to continue paying and increasing its dividend.