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This Dividend Aristocrat Looks Undervalued Right Now

Barchart - Tue Jan 23, 1:50PM CST

Dividend Aristocrats, an elite group of dividend-paying S&P 500 Index ($SPX) stocks, have earned that title for their impressive track record of at least 25 consecutive years of dividend increases. As we head into 2024, the allure of these Dividend Aristocrats is stronger than ever. These stocks not only offer consistent, reliable dividends, they also tend to boast resilient business models, unique competitive edges, and potential for long-term growth. With concerns rising about premium valuations for some of the artificial intelligence (AI) leaders of the tech sector rally, the appeal of the Aristocrats is their long-term track record of navigating various economic cycles.

One of these top-tier income stocks is Sysco Corporation (SYY), a company that has consistently raised its dividend for decades, and displayed its ongoing commitment to returning cash to shareholders via buybacks, too. And right now, SYY looks cheap, based on a few key metrics.

Let's dive into why Sysco seems undervalued, and why it could be a great pick for investors focused on income.

About SYY Stock

Sysco Corporation is a major player in North American food service distribution, serving up a variety of goods to restaurants, hospitals, schools, venues, and more. With over 50 years of consecutive dividend growth, SYY isn't just a Dividend Aristocrat; the company has earned its stripes as a Dividend King.

Right now, SYY is paying out $0.50 per share each quarter, adding up to $2.00 per share annually. At the current stock price, that's a 2.65% dividend yield, providing a steady income stream for shareholders. Sysco's been steadily increasing that dividend at a 6.24% growth rate over the past 5 years, and maintains a reasonable 49% payout ratio - which means they have plenty of room to keep raising these quarterly dividends.

Over the past year, Sysco stock has lagged the broader equities market with a decline of 4.5%. By comparison, the S&P 500 has gained more than 20% over this same period. 

In 2024, though, SYY is flexing some muscle with a gain of 3.5%, versus a return of 1.7% for the SPX.

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At current levels, the shares look reasonably valued. Sysco is trading at a forward P/E of 17.5x, which is a modest discount to the Consumer Staples sector median of 17.93. There's a more notable discount when it comes to the stock's forward price/sales ratio of 0.48, compared to the sector median of 1.13. 

These metrics also represent a discount to SYY's own five-year average valuations, suggesting now may be a good time to scoop up the shares.

What's the Growth Forecast for Sysco Stock?

During the first quarter of fiscal year 2024, Sysco reported a record operating profit of $803.6 million, up 9.1% year-over-year, which the company attributed to "meaningful gross margin expansion and positive operating leverage." 

The company returned a total of $352.9 million to shareholders during the quarter via buybacks and dividend payments. Although free cash flow was negative in Q1, due to seasonal impacts, SYY ended the quarter with a cash balance of $569 million

Sysco is scheduled to release its next quarterly earnings on Jan. 30, with the consensus calling for earnings of $0.88 per share. 

Looking ahead, for the fiscal year ending June 2024, Sysco is expected to increase revenue 4.1% to $79.4 billion, with earnings per share (EPS) up 9.7% to hit $4.75. In fiscal 2025, the growth is expected to accelerate, with sales projected to climb 4.3% to $82.9 billion. 

What Do Analysts Expect for SYY?

Sysco has scored the thumbs-up from top analysts, with an average rating of “Strong Buy.” Out of the 15 analysts keeping tabs on SYY, a solid 11 are shouting "Strong Buy," while 4 are giving it a "Hold."

The average price target is $80.58, implying expected upside of more than 6%.

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Is Sysco Stock a Top Pick?

In summary, Sysco Corporation looks like a solid investment option, thanks to its history of dedicated dividend growth and resilient financial performance. With anticipated growth in both revenue and earnings on the horizon - paired with the company's solid cash position, robust margins, and relatively low valuation - SYY stands out as an appealing pick for value and income investors alike. 


On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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