Dividend King Sysco: Buying On The Dip

Key Points

• Sysco had a mixed quarter but one thing is clear, business is better than prepandemic times. 
• The company pays a healthy dividend and repurchases shares, too. 
• Trading at 18.85X earnings its no value but should be trading at even higher levels. 

Dividend King Sysco NYSE: SYY pulled back following its FQ2 results but the move is already catching the attention of investors. No surprise there, this stock is a solid blue-chip operator in the US foodservice space and pays a healthy dividend so investors should be targeting this pullback as an entry point despite the weakness in bottom-line results.

The weakness is not something the market likes to see as evidenced by the pullback in prices but offset by YOY growth and plans to control costs. Remember, Sysco is a Dividend King with 54 years of consecutive increases to its credit and ample room on the books to continue increasing it for the foreseeable future. 

Sysco Has A Strong Quarter, But … 

Sysco had a strong Q4 with only one but to be aware of. The revenue of $18.59 billion grew 13.9% and came in as expected but the earnings, which came in 40% better than last year, missed the consensus by $0.04.

This is bad news but only a minor issue considering the rest of the data. The strength was driven by a 5% increase in volume in the US Foodservice business that drove a 13.7% increase in revenue that was compounded by a 17% increase in International sales. 

The margins are where the devil is. The gross margin improved by 29 basis points but that was offset by higher operating expenses that cut into results. The takeaway, however, is that cash flow and free cash flow are allowing the company to repurchase shares and that is juicing the per-share results and greatly improving the company’s ability to pay dividends and continue increasing on an annual basis. 

Sysco didn’t give any guidance, but it appears to have momentum in both the US and International businesses. This makes the 3.9% revenue growth expected by the analysts easily doable, although there may be some readjustments to the earnings outlook and perhaps some downward adjustments to their price targets.

As it is, the consensus rating for the stock is a Moderate Buy with a price target of 20% above the current action and has been relatively steady over the past year. 

An Institutional Bottom In Sysco? 

The institutions have been buying Sysco over the last year and netted more than $1.6 billion or 4.6% of the market cap, with shares trading at $77.25. Interestingly, institutional activity peaked in Q1, Q3 and Q4 of 2022 when the price action was hovering near a major support level that coincides with pre-pandemic signals. This has their ownership up to 81% and growing, and they are likely buying the stock on this dip as well. 

Turning to the chart, it is easy to see significant support for this market at the $70.35 level. The post-release action had the price down near that level, but buyers stepped in well above it which is a very bullish sign.

Assuming the market follows through on this signal, it is likely Sysco stock will begin moving sideways immediately, and it may move upward within the trading range. The top of the range is near the $85.75 level, which is also consistent with pre-pandemic price action. Considering that business and earnings are above those posted in 2019, the dividend has been increased, and shares have been repurchased, this stock should already be trading at a new all-time high.