Dividend Aristocrats Part 16 Of 52: Sysco Foods

Sysco (SYY) is the largest food distributor in world.  The company distributes food products to restaurants and stores throughout the US (including Alaska), Canada, Ireland, and Puerto Rico.

Sysco has a long corporate history.  The company was founded in 1969 and has increased its dividend payments for 44 consecutive years.

Trian Fund Management recently became the largest shareholder of Sysco.  Trian now owns 7.1% of Sysco.  Here’s what Trian CEO (and famous activist investor) Nelson Peltz had to say about his stake in Sysco after gaining a seat on the company’s board:

“Sysco is a leader in its business, and we believe it is undervalued and has tremendous long-term potential. As Sysco’s largest shareholder with an approximate 7.1 percent ownership position, we welcome the opportunity to work constructively with the Board and management.”

Declining Competitive Advantage

There’s no question Sysco is in need of a managerial talent infusion.  The company’s operating margins have been declining since 2010:

  • Fiscal 2010 operating margin of 6.4%
  • Fiscal 2011 operating margin of 5.9%
  • Fiscal 2012 operating margin of 5.4%
  • Fiscal 2013 operating margin of 4.9%
  • Fiscal 2014 operating margin of 4.6%
  • Fiscal 2015 operating margin of 4.8%
  • Operating margins grew 0.2 percentage points in fiscal 2015.  Prior to fiscal 2015, operating margin declined every year since 2010.

    Falling margins are a sign of a declining competitive advantage.  It is likely that recent margin improvements are a result of sinking gas prices rather than structural improvements.  Low gas prices mean lower transportation costs for Sysco – which raises margins.

    The food distribution industry is slow changing.  Restaurants will always need food supplies, after all.  Due to the commoditized nature of Sysco’s services, competition is fierce.  Sysco’s declining margins show strong competition in the food distribution industry.

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    Author: Travis Esquivel

    Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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