Food distributor Sysco (NYSE:SYY) is never flashy, but the company has an enviable track record of market share growth and consistent free cash flow growth. That makes it a staple name on lists of quality dividend growth stocks and conservative growth ideas. What's more, it is not a bad way to play what could prove to be many years of inflation pressure. (To help you build a dividend portfolio, read Build A Dividend Portfolio That Grows With You.)

TUTORIAL: Stocks Basics

Solid Third Quarter Performance
Sysco reported sales growth of just over 9% for its fiscal third quarter, quite a bit better than the consensus expectation of just under 6%. Growth was clearly fueled by food inflation of more than 5%; case volume growth was about 2% and real sales growth was just under 3%. That is relatively consistent with the customer traffic patterns being reported by major U.S. restaurant chains like McDonald's (NYSE:MCD) and Brinker (NYSE:EAT), so there is not much reason to think that Sysco is losing share.

Profitability continues to be a bit more challenging, though. Gross margin slid about 30 basis points this quarter, and Sysco picked up a bit of that through the operating expenses, as operating expense grew a little more than 7% and operating margin slipped about 10 basis points. (For help, check out Understanding The Income Statement.)

How Far Can Sysco Push?
Sysco has a great deal of leverage when it comes to pushing along its higher costs. Restaurants thrive on consistency, and they are not going to drop Sysco lightly. By the same token, restaurants are getting squeezed between higher food and fuel costs (distributors like Sysco tack on fuel surcharges) and higher capital equipment costs from companies like Middleby (Nasdaq:MIDD) and Manitowoc (NYSE:MTW).

At some point, then, something has to give. Restaurants will delay capital equipment spending as long as they can, but the intense pressure of value menus from quick-service chains and prix fixe offerings from brands run by Brinker, Darden (NYSE:DRI) and DineEquity (NYSE:DIN) limit how much cost inflation they can push on to their customers. Along similar lines, though, is the threat that a rival like Performance Food Group or U.S. Foodservice will absorb some of that inflation themselves to gain share. (To help you fight food cost, see 22 Ways To Fight Rising Food Prices.)

Looking to Go Overseas
Sysco is hoping that it can replicate its success overseas. There are plenty of restaurants and food service operations in other countries, and it should be a growth industry in emerging markets as standards of living improve. That said, it takes time and money to build the distribution networks, and this will be a slow process that will take years to show real results.

The Bottom Line
Sysco's popularity with the dividend and conservative growth crowds means that it rarely falls to a compelling valuation point. The same is true today. Investors buying Sysco today can probably look at 10% appreciation before reaching fair value. Remember, though, that Sysco pays better than a 3% dividend and should be able to grow free cash flow at a mid-single digit rate for the long term. All in all, then, that's a setup for market-equivalent growth with below-average risk, and that is not a bad combination. (To learn more about growth stocks, check out The Power Of Dividend Growth.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  2. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  3. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  4. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  5. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  6. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  7. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  8. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  9. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  10. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center