Recent Sale

brokenpiggybankI don’t sell stocks often. You can see this for yourself – I have more fingers than Recent Sale articles published on this blog over the last 3½ years.

And that’s because I look at every stock as a fruit-bearing branch on my dividend tree. Every stock sale means I’m cutting a branch, which will reduce the amount of fruit my tree can possibly produce. However, if the occasional pruning makes the tree bigger and stronger, then it’s a chore I’ll willingly and dutifully perform.

I’m actually getting to the point to where I’m loathe to sell shares in businesses, even those that are underperforming. Temporary issues can cloud one’s vision of long-term operational expectations. Furthermore, I once read that a portfolio is like a bar of soap; the more you handle it, the less you’ll have in the end. I believe that’s true.

But this most recent transaction has been a long time coming. I’ve been waiting for operations in this particular business to improve, but hope has not magically turned into reality. This is a bit sad for me, as this is one of my oldest holdings. But it’s time for me to say adieu and bid the company the best of luck.

I sold 29 shares of Sysco Corporation (SYY) on 11/25/14 for $39.50 per share.

Overview

Sysco Corporation, through its subsidiaries and divisions, is a leading distributor of food and related products across North America. They also have operations in Ireland.

Sysco is the largest such distributor in North America, with an estimated 17%  market share. They distribute a wide variety of food and equipment products, including fresh and frozen meats, dairy products, fresh produce, canned and dry products, and poultry.

The company operates 194 distribution centers and serves approximately 425,000 customers.

62% of their fiscal year 2014 sales were generated via customers in the restaurant industry. No one customer accounted for more than 10% of FY 2014 sales.

Fundamentals

The primary reason I sold Sysco is due to deteriorating fundamentals, which I’ll discuss below. Their fiscal year ends June 30.

Revenue grew from $30.282 billion in fiscal year 2005 to $46.517 billion at the end of FY 2014. That’s a compound annual growth rate of 4.89%. Certainly not the worst I’ve seen, and perhaps not all that unsurprising considering the mature and competitive market they operate in.

Earnings per share increased from $1.47 to $1.58 during this period, which is  a CAGR of 0.81%. Obviously, this is extremely disappointing.

S&P Capital IQ predicts EPS will grow at a compound annual rate of 9% over the next three years, anticipating improved purchasing power and cost synergies associated with an acquisition as I’ll discuss below.

You might be asking yourself why I would invest in a company with such poor growth in profit, but Sysco was actually growing at an attractive rate when I invested. I initially purchased my 29 shares on 10/7/2010 for $28.60 per share. Their earnings from fiscal years 2005 to 2010 looked like this: $1.47; $1.36; 1.60; 1.81; 1.77; 1.99. So there’s a clear uptrend here. Leading up to my purchase, the company was growing at a rather brisk rate. However, fiscal year 2011 started a downtrend in EPS, as you can see in the results from fiscal years 2011 to 2014: $1.96; 1.90; 1.67; 1.58.

The dividend growth has likewise slowed down, which is unsurprising considering the anemic growth in profit. The five-year dividend growth rate stands at 4.9%, and this rate is declining. For the last few years, the dividend raises have been a penny per share per quarter. The most recent increase that was announced on 11/19 amounted to 3.44%, and this announcement led to me considering selling my stake after years of disappointing results.

Now, one might take solace in the fact that the company has increased its dividend for the past 45 consecutive years, and you wouldn’t be wrong to consider that as a major positive aspect for this company.

The stock yields 3.03% here, which is attractive. But with a payout ratio of 76.9%, I can’t imagine dividend growth is going to increase anytime soon. So you’ll have to decide if a yield of 3% and dividend growth of ~3% suits your investment needs.

The company’s balance sheet is leveraged, but it seems appropriate to me. The long-term debt/equity ratio is 0.45, while the interest coverage ratio stands at 12.93. These are pretty attractive numbers.

Profitability metrics are rather disappointing. Net margin has averaged 2.6% over the last five years, and this number continues to move in the wrong direction year after year. The company cites an inability to pass along certain rises in input costs along to customers. Return on equity averaged 24.25% over this time frame. This also continues to decline annually. Both of these numbers were much healthier when I initially invested back in 2010.

Qualitative Aspects

So I mentioned an acquisition earlier. In December 2013, Sysco announced that it planned to acquire US Foods. US Foods is the second largest food distributor in the United States, so you’re looking at locking up the two largest players. This announcement kept me hanging on for a bit longer than I probably should have, though the announcement gave a nice price pop to shares that would have otherwise most likely not have materialized.

Now, this announcement offers benefits and drawbacks. At first, I was focusing on the benefits only. This seemed to be the savior for my otherwise poor investment. Locking up the two largest players will surely lead to cost synergies, greater economies of scale, increased purchasing power, and better clout across the industry. And I’m willing to bet these benefits will largely materialize, depending on what kind of demands are placed on the companies in regards to the acquisition. Potential asset sales are possible.

However, I wasn’t really looking at the negative aspects. Primarily, Sysco is valuing the deal at $8.2 billion. That’s a pretty significant acquisition for a company with a market cap of $23.5 billion, so there’s a chance that they’re biting off more than they can chew. In addition, there’s the equity they’ll have to issue for the acquisition – $3 billion worth of common stock. How that affects the dividend is anyone’s guess. And then there’s the debt, as Sysco will be assuming $4.7 billion worth of debt from US Foods. I’m sure they’ll refinance as much as they can, but that’s a hefty load for a company that currently sports $2.4 billion worth of long-term debt.

All in all, I just see a lot of potential issues here with this acquisition. And that’s not to mention that it’s been continually delayed as antitrust regulators continue to review all the details.

But Sysco by itself is still a solid business. They are the largest player in a market with plenty of expansion potential, though the market itself is quite mature. Morningstar recently reduced their economic moat from wide to narrow, citing their inability to pass along input cost increases, and this bears itself out in the margin compression. The good news is that this mature market leads to stability, and I find it highly likely that SYY will continue to pass along mediocre dividend raises for the foreseeable future. I just find the upside limited.

Overall, I view Sysco as highly competitive, but the industry they operate in is brutal. I believe I underestimated this when I initially invested in the company.

Risks

I view Sysco as a low-risk investment, overall. However, there are near-term risks, primarily with the proposed acquisition. Considerable debt will be assumed and there will also be dilution to current stockholders, if the acquisition is approved. One risk I see with the heart of the business is the fact that the majority of their sales are to the restaurant industry, and that remains a stressed and competitive industry itself.

Valuation

SYY trades hands for a P/E ratio of 25.32 right now, which I find egregious considering their lack of growth over the last decade. Their P/E ratio was on par with Visa Inc. (V) (a high-growth stock) until Visa popped after the last earnings report. Sysco’s P/E ratio is obviously well above the broader market, while it’s also considerably higher than its own five-year P/E ratio average of 16.8. I believe part of that premium exists due to the acquisition. Any issues with the acquisition could substantially negatively affect the stock, in my view.

I valued shares using a dividend discount model analysis with a 10% discount rate and a 6% long-term growth rate. I was being liberal with that growth rate considering their results over the last 10 years. There is some uncertainty, however, due to the potential acquisition, so I’m attempting to model in some benefit of the doubt. The DDM analysis gives me a fair value of $31.80.

Conclusion

I’m a long-term investor. And I’ve been invested with Sysco for more than four years now. I gave them opportunity after opportunity to improve results, and just the opposite happened. I understand they’ve been restructuring and the restaurant industry has been brutal, but I feel my capital can do better elsewhere. When considering whether or not to sell, I asked myself if I would invest in Sysco today, and my answer was an unequivocal “no”.

My total cost basis was $836.40. My total proceeds were $1,138.48. I received a total of $127.60 in dividends over the last four years. That means my total return on SYY was 51.4%. This is much better than I would expect with the way operational results have panned out over the last four years, but I did better than I should have due to the expansion of the P/E ratio. Fine by me, and allowed me to get out with a solid return. However, this was still largely disappointing because there’s the opportunity cost of doing much better elsewhere. I consider this a poor investment on my part, but I still contend that I was looking at better numbers when I placed my bet. Just didn’t pan out as I expected, which happens. That’s why you diversify, and I never added to my SYY position because things started to move in the wrong direction.

As always, I’m going to include a couple of other valuation opinions below, as I use these to concentrate my reasonable valuation estimate:

Morningstar rates SYY as a 3/5 star value, with a fair value estimate of $42.00 (pro forma, factoring in the US Foods acquisition).

S&P Capital IQ rates SYY as a 2/5 star sell, with a fair value calculation of $34.80.

This sale reduces my annual dividend income by $34.80, based on the current quarterly $0.30 dividend.

I’ll update my Freedom Fund in early December to reflect this recent sale.

Full Disclosure: Long V

What are your thoughts? Do you like Sysco? Think I made a mistake? 

Thanks for reading.

Photo Credit: Stuart Miles/FreeDigitalPhotos.net

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77 Comments

  1. It’s always unfortunate to have to sell. Nice return on SYY, though. And now you’ve got another pellet in your pea shooter! I’m assuming that you’re eyeing more shares of BBL? 🙂

  2. DM,

    Saw this tweet you had the other day and can see why you sold – the high price to earnings ratio, coupled with low/to none earnings per share growth, as well as a declining dividend growth rate – doesn’t bode to well for dividend investors – especially if you could use the capital to invest into a better/forward looking dividend growth stock, such as BBL that you have been buying (haha, which I think we’ve all made moves on today, maybe…haha).

    I respect your sale and am impressed with the lack of emotion you have in your investment decisions – pure fundamentals and numbers – I dig it. A big move to make and a big decision, you have your reasons that are supported. Now time to use that capital!

    -Lanny

  3. After reading your post, I can see the reason for the sale, as many other opportunities are out there for your money. Good job on getting a nice return on the investment though! +50% is awesome in 4 years!

  4. Wow, and here I was thinking you *never* sold!

    Still; There’s alot to be said for cutting your losses and knowing when to pull out. I expect alot of ‘buy and hold’ investors would be too paralyzed to consider selling a losing stock. A tough choice to make no doubt, I hope it works out but either way: well done for taking action when you thought it was needed.

  5. Thank you DM for sharing your moves..

    51.4% in 4 years is pretty good return when you compare with people who put their money in CDs and government bonds, but not good as the broader market return in the same period.

    SYY is in my watch list, but after reading your analysis, I think I should put my capital somewhere to get high return.

    Now, you have some money to deploy, so we could expect a purchase in next few days.

    Best Regards,

  6. Interesting move Jason. In my mind this also comes back to the conversation we were having last month about customer’s disposable incomes and the restaurant industry. Thanks for sharing
    -Bryan

  7. Wow – I definitely did the ‘double-take’ when I read the headline!

    I’m really impressed with the logic you laid out and the decision to sell. It’s never easy to sell a business that isn’t doing well, especially when you have to explain it to others. But I think given you definitely wouldn’t buy it today then it’s a great decision, especially if there’s other businesses out there that provide much better opportunities. And that 50% return is still fantastic, especially as far as ‘poor investments’ go!

    You gave it the opportunity to turn around, being a long-term investor, and it obviously didn’t co-operate. I know you ideally want to hold onto some of these investments forever, but we also can’t get attached to them, no matter how long they’ve been a part of your portfolio. There’s nothing worse than letting these investments stick around like a dark cloud if you really don’t feel they belong in the portfolio.

    Look forward to hearing what you do with this capital, and hopefully you don’t need to make too many more decisions like this in future.

    Cheers,

    Jason

  8. I added shares of BBL and XOM today since the oils are getting hammered. I also bought back the shares of NOV that I sold a week ago since the price dropped over 10%. Shouldn’t have sold NOV in the first place, but am lucky to get back in at a discount.

  9. Cant blame you for selling. A company that has deteriorating fundamentals and has only a 4% CAGR is probably better off sold than hoping things will turn around. Best wishes with your new investments.

    R2R

  10. Thanks for the post, I was curious where you go to find long term earnings data. Most of the sites I go to only show the last 3 years earnings. Thanks for any help.

  11. I see why you sold. For sure. Thanks for the update and I will act accordingly. Just want to say THANKS for all your efforts and sharing your investment ideas and strategy. I do not have the time to do the work and I greatly appreciate that a like-minded person is doing it for me. Happy Thanksgiving, Jason and Claudia. Peace and Blessings. Dan

  12. Lanny,

    “Now time to use that capital!”

    I already used it. Had to make that move today. 🙂

    Yeah, it’s pure numbers for me. I’m extremely patient, perhaps too patient at times. I kept reading forecasts for the turnaround, but it just never came. Now there’s the merger that will hopefully turn them around. We’ll see. If things markedly improve, I’m not against investing later. But the numbers just don’t make sense to me here. Just glad I was able to receive a decent return on a poor investment.

    Thanks for dropping by!

    Best regards.

  13. Can’t blame you for selling and I definitely agree with you on your reasons for selling Sysco. You got a nice return on the stock so time to move on to another great company.

  14. Agent,

    Exactly. It’s all about opportunities. Every stock idea competes with every other available opportunity, and I just think there are better opportunities elsewhere. I’m not real pleased with 50% compared to what I know I could have otherwise generated, but it’s not bad considering their poor operational performance.

    Cheers!

  15. ERG,

    Haha. I don’t sell often. Staying with a sinking ship for four years is a testament to my patience. 🙂

    It’s tough to sell. I hate selling. It incurs transaction fees and tax bills that I’d rather avoid, and there’s always the chance that things will turn around. But the poor performance wasn’t the only issue. The valuation is just incredible here, and I’m willing to sell my stake to a Mr. Market that is, in my view, too enthusiastic about their future potential.

    Thanks for the support!

    Take care.

  16. FJ,

    Right. Not nearly as good as the broader market during that time frame, which is disappointing. I don’t compare myself to the S&P 500 index, but I’m disappointed knowing that I could have done better elsewhere. But not every investment will turn out as expected. I got lucky on this once due to the P/E ratio expansion.

    The capital from this sale was already put to work. I’ll be discussing that in the coming days, before I update the Freedom Fund next week.

    Sysco could do well. I expect smooth results. It’s not a volatile play, so it’s been easy to mostly just let it do its thing. But “its thing” just hasn’t been good enough for a long time now.

    Cheers!

  17. Bryan,

    Yeah, exactly. Sysco is largely tied to the North American restaurant industry. It’s been weak for a while. Could very well turn around, and I anticipate that Americans will still be going out to eat in droves over the long haul. Unfortunately, it’s just a brutal industry. Highly competitive and low margins. I think one can do better elsewhere. My initial investment thesis was based around better fundamentals, but I figured the largest player in a stable market with a lot of untapped potential could do well. I figured at least the stealing of market share, but the numbers have moved in the opposite direction.

    Thanks for dropping by. Hope all is well with the family. 🙂

    Best wishes.

  18. Jason,

    It’s definitely tough for me to sell. I intend for every investment to stay in the portfolio forever. But sometimes it’s just not to be. I always try to remember that quote – was it Lynch? – that goes along the lines of a stock doesn’t know you own it. It doesn’t care if you own it or not. Thus, it simply comes down to opportunities and where the capital can go the furthest. And I just think this is opportunity isn’t as solid as others.

    I never fall in love with an investment. It’s purely a business decision. I always want to give it the proper amount of time and not overreact, and being a long-term investor gives you proper perspective. It’s easy to get lost in the daily noise of the market, but really just looking at the operations will give you the answers you need. 🙂

    Best wishes.

  19. Seraph,

    It’s a nice return considering the circumstances. I know I could have done better, though, and that annoys me. Can’t win them all, however. And this journey doesn’t require home runs anyway. Still, I’m glad to move on.

    BBL is where it’s at. I didn’t plan on that being a large position for me, but it’s too cheap to ignore. Happy to be in a position to round that position out nicely before moving on. 🙂

    Have a great weekend!

    Best wishes.

  20. KeithX,

    I added to BBL as well. I was *this close* to buying more NOV, especially before the ex-dividend date. But BBL was just too cheap. It was already selling for a hefty discount, and now it’s just ridiculous. Plus, oil is a rather small part of the business anyhow.

    We’re on the same page here! 🙂

    Cheers.

  21. R2R,

    Yeah, it’s just really gone the wrong way over the last few years. If not for the premium that’s being placed on shares I would have done very poorly here. I got lucky. 🙂

    Take care!

  22. jerry,

    A number of places will give you this data. Annual reports for most companies go back at least five years, but a search can pull up annual reports from 10 years ago or older. I typically use Morningstar and S&P Capital IQ for condensed reports for the sake of saving time.

    Cheers!

  23. dannn,

    No problem! Happy to share if it means I’m inspiring and empowering investors out there. 🙂

    I hope you had a very happy Thanksgiving over there. Ours was great, though we probably ate too much. No surprise, though!

    Best regards.

  24. Tawcan,

    Yeah, the return was poor considering the potential of going elsewhere with the capital. But I got lucky to get out with what I got. Time to move on, indeed. 🙂

    Cheers.

  25. DM, looking get some additional capital to take advantage is some of the oil names after today’s big sell-off? I am guessing yes. 🙂

    I am eyeing a little portfolio trimming as well to add to my oil names.

  26. AA,

    Well, I actually wasn’t trying to free up capital for today’s sell-off. I sold SYY on Tuesday, but the timing worked out pretty fortuitous. 🙂

    I’m not sure how much I want to add to some of these names here, as energy is north of 15% of my portfolio already. But I’m willing to go value hunting when and where those opportunities may knock on the door. I think some of the supermajors could probably fall some more, as I bought into a couple of them at cheaper levels with higher oil prices. We’ll see!

    Thanks for dropping by.

    Best wishes.

  27. Hey Jason, interesting sale, makes sense. I generally try the other approach to average down and just tuck the thing away for the 10yrs+ Every company has ups and downs but then you just never know right – it’s a hard call. I’m currently having some fun with the energy stocks in my portfolio, i’m taking a loss in a few of them but i’m not worried, why? energy is always needed and i’m looking 5-10 yrs out. I’m sure some companies will be going out of business, dividends will get cut, mergers will happen but once the house clears, it is game on again, same old story. I think the valuations are compelling right now but still not seeing capitulation just yet, i think the big fallout will be in first half of 2015 and i think we’ll be getting more downside with end of year tax selling soon. Taking advantage where i can..cheers

  28. DM,

    Congrats, hope the recent buy makes you happy. I just reviewed Yahoo Finance and the price of crude oil is now down 10.17%, this is very serious. I held XOM, COP, today but I sold out and took a little profit for I believe that energy stocks are in serious trouble. I believe if I wait until next year or when the dust settles to purchase more shares it will be a much, much, much lower entry price. For, I have tried dollar cost averaging and all it does is take away from the total returns even with the dividends reinvested. Many shareholders believe that the end of big energy stocks is over with all of the current forms of alternative energy available these days. Such as solar, hybrid, electric, cars, ect, Are energy stocks really at the end or is that 10.17% drop in crude oil prices just trickery, that’s the question?

    Best Wishes,
    B

  29. Tales,

    Well, I’m a huge fan of averaging down. And that’s generally what I do when a high-quality company experiences weakness. But I wouldn’t be averaging down on SYY. I’d be averaging UP. And that’s up on a stock with a P/E ratio of 25 with almost no growth over the last 10 years. Now, some people could make an investment case there, which would probably largely depend on your feelings in regard to the acquisition of US Foods. I simply asked myself if I would invest in a stock with a 3% yield, ~3% dividend growth, a P/E ratio north of 25, and zero growth? And my answer is no.

    But I took the capital from this sale to average down on another stock I’ve been busy buying. The market is full of buyers and sellers. 🙂

    Take care!

  30. DM,
    sounds like you made a smart, well informed/well thought out decision. I always had SYY on my watch list because of the moat that I believed they have built over the years. The Morningstar downgrade was news to me and while it isn’t the end all be all, it should force you to consider whether SYY merits a premium (which you did a great job of in your article). There are just too many other opportunities out there to continue to hold a company with a deteriorating moat and metrics.
    You will enjoy your new investment much better! Keep up the great work. Also, don’t think I forgot you are from Michigan! We have a big rivalry game looming tomorrow, so may the best team win!
    Bert

  31. Brittney,

    I wish you luck there. I’m moving in the opposite direction. I think the world will still be dependent on O&G for the most part 10 years from now. I imagine at some point alternative energy sources will be major energy providers at some point, but I don’t anticipate that happening very soon. In the meanwhile, oil gets harder to find and the natural laws of supply and demand will dictate all of that. A perfect scenario would be the tapering of supply just as demand tapers, then you get the uptick of alternative energy. Of course, that’ll probably never happen perfectly like that. So I just take advantage of volatility in the meantime.

    I don’t want energy to be an overwhelming portion of my portfolio, though. So it’s a careful dance there.

    The other question is if you believe that solar/hybrid/electric cars and all of that are going to be big in the next five years and that’s where the world is going, where do you invest? Where are the proven players that can provide you proof of profit via tangible dividends?

    Again, wish you luck. But you’ll be selling me your shares.

    Best regards.

  32. Bert,

    Haha. May the best team win! 🙂

    Yeah, the fundamentals are deteriorating here. That’s always something to be mindful of. Especially when the valuation is simultaneously stretching itself. I don’t know who would be interested in paying 25+ times earnings for a stock with 0 profit growth over the last 10 years and an unsure future, but that’s just me. Obviously, someone’s buying those shares. And I’m happy to sell.

    Best wishes!

  33. DM,

    Great website, learning many new things.

    My energy stocks are only 12.5% of my total portfolio.

    I am going to buying BBL soon and averaging down on my XOM position. I think the demand for oil, gas, and material will once again make a comeback. Buy and Hold for the long-term !

  34. Even though I am heavy on the energy sector sometimes value just can not be ignored. Mike, Keith, Jason what are your thoughts on CVX? I see where you stand on BBL and XOM. With oil prices falling I would really like to add to all 3 but with limited capital I’ll have to pick best of breed for now. Hope everyone had a great Thanksgiving.

  35. Rob,
    I added to XOM, but it could just as easily have been CVX. The reason I went with XOM is because I had a smaller position than I do in CVX, so I was trying to even things up. If CVX is down again Monday then I will definitely be adding shares.
    Good luck,
    KeithX

  36. Sam,

    The short-term can be pretty ugly, as hysteria and fear take over. But I think the long-term potential for some of the larger energy firms remains as bright as ever. Our worldwide dependence on oil and gas isn’t going anywhere anytime soon. Of course, it’s not a bad idea to hedge your bets a bit, and I certainly like some of GE’s plays on alternative energy.

    Thanks for dropping by!

    Best regards.

  37. Rob,

    I agree with Keith. I think both are great companies. I’d prefer XOM right now simply due to the fact that I have less exposure to the company. But I’d like XOM a lot more in the mid $80s, and it’s very likely we’ll see that at some point here. I’m not sure the massive drop in oil has been fully realized in the share prices for some of these companies.

    Cheers!

  38. DM, you are an inspiration to all of us. You are doing a fantastic job. I don’t know you but I am proud of you just the same. I bought XOM today and added to CVX. Also added to the etf XLE. Oil always comes back if you are patient.

  39. R Martin,

    Thank you. I really appreciate that. I’m just so lucky to be in a position to inspire others to take action. Financial independence is out there waiting for you. You just have to want it and do what’s necessary to attain it.

    I’m definitely digging the pullback in energy. I have no idea where oil is going over the short term, but it appears pretty clear to me that energy demand will only increase over time. Of course, improved measures in efficiency continue to increase supply, but that all balances out in the long term. Supply increases to meet demand to the point where it overshoots and causes a glut and then production slows down until prices recover. Nothing new in energy. The only thing I’m concerned about is the possibility of increased production from the Middle East to meet certain revenue quotas, which could cause further price issues or more of a long-term problem. We’ll see.

    Best regards.

  40. Hey DM, just curious if you consider gas and electric utilities as energy stock or just utilities ? Thanks

  41. I got into SYY early in 2011. The trend the entire time has been $.01 per quarter/year increase on the dividend and I’ve been pondering moving the money to something like COP (adding to the position already in the account). Plus oil stocks have been hammered in the last week, so between the higher yield and better growth prospects long-term…. I haven’t sold a position in almost 4 years. Wow.

  42. jerry,

    I personally consider utility stocks as utilities. I suppose an argument could be made both ways, but I lump utilities into the utility basket. They generate and provide energy, but they operate under very different circumstances compared to, say, Chevron.

    Cheers!

  43. Eddie,

    Nice! It’s crazy to realize that you’ve been sitting on a stock for four years. Some people just can’t wrap their brains around that. To me, that’s the ONLY way to invest.

    SYY has been a better investment than one might think over that time frame, due to the big pop after the acquisition talks. The market ran the stock up to almost unbelievable levels here. The old saying goes “Buy the rumor, sell the news.” That seems particularly appropriate here.

    I wish you the best of luck deciding which way to go there.

    Best regards.

  44. DM,

    I see your reasoning here, but have to respectfully disagree. Yes, Sysco is a bit expensive here and there is little growth in this mature business. But just because it is not a buy doesn’t mean it is a sell. With a 15% capital gains tax you have to make sure whatever investment you reinvest your sale proceeds in outperform Sysco by at least 15% just to break even. Four years is too short to write this solid company off. Many great companies like IBM and Coke for example have taken much longer to turnaround than that. Sysco would have been a solid hold.

    Anyway, now that you have already sold, perhaps it is time to reinvest it into some energy and commodities stocks? The Black Friday sale was pretty nice, and I’m cautiously optimistic that there is more room to drop as the commodities bubble of the past 10-15 years continues to deflate.

  45. I think your reasoning makes sense, there is no point keeping a stock that you consider so expensive relative to growth prospects, when there is better value elsewhere.

    A slightly different question: How big part of the portfolio are you comfortable having invested in oil companies? Since it seems to be in this sector where odds of finding value is the greatest right now.
    Do you have any criteria that specifies how big part a specific industry may constitute of your stock portfolio?

    Good read as always, keep up the good work!

    /Best Regards

  46. Difu Wu,

    You could very well be right there. Maybe Sysco turns it around and business operations start to improve. And if that happens, I wouldn’t be opposed to investing there again. But a stock yielding ~3% with ~3% dividend growth just isn’t cutting it for me and my goals. It may work for you or others, which is fine. In the end, every stock is competing for my capital. And I believe I can find an investment with a higher yield, better dividend growth potential, and at a lower valuation. And, of course, I did find such an investment, as I already reinvested this capital back into one of those commodity stocks during the Black Friday sale. 🙂

    I’d hesitate, however, to compare Sysco to Coke or IBM. You’re talking about a mostly domestic food distribution company with low margins and a 17% market share, and comparing that to global powerhouses in their respective industries. That said, if IBM’s valuation triples while its dividend growth slows to ~3%, I’d probably sell anyhow. Valuation is relative, but I can’t see how a company with 0% growth is worth 25 times earnings. IBM, meanwhile, has a P/E ratio of ~10. I’m okay waiting the latter out.

    Best regards.

  47. LTI,

    I’ve long targeted 10% to 12% for energy. Maybe arbitrary, but it seems appropriate for me and the potential I see in energy. The S&P 500 has something like 8.5% weighted to energy, so I’m not far off. My current allocation is north of 15%, so I’m heavy right now. I’m buying where the value is, but I’m probably going to have to lay off energy at some point here. I’ve tried to avoid energy for the most part of 2014, but I’ve picked up value here and there like BP and BBL.

    Thanks for all the support!

    Take care.

  48. Completely understand the decision, been relatively stagnant. However, if the US Food acquisition goes through next year, this could become a bit of a monopoly for the business and completely change the outlook of the company. Announced almost a year ago now, it will be interesting if this ever materializes though. It’s been on a watch list for me for quite some time.

  49. As always, you make a compelling case. I can certainly see why you made the decision you did. Don’t think I would have made the same one though. I don’t think I’m removing it from my watchlist just yet. It has quite the moat, and a decent yield. I doubt it will show the gains you received any time soon, but I want to see how the acquisition plays out before removing it from consideration. Can’t wait to see how you reinvest the proceeds!

  50. DM, saw this come through on twitter, but only just getting round to commenting. It’s really tough to make that decision to sell a stock, but that payout ratio is REALLY high! I think you did the right thing. There are so many opportunities out there in terms of high quality dividend payers, so why keep money in a business that less than par?

  51. Dan,

    I think the odds of the acquisition going through are great. Possibly some asset sales or something else, but the pro forma company will be by far the largest company in this space. I think you have to ask yourself, however, whether this is a space ripe for outstanding long-term returns. Waste Management is a good example of a company that is dominant in a poor industry for investment. Just one of those things. I’m not opposed to investing later if things markedly improve, but I have a hard time paying 25 times earnings for Visa (it’s growing at 20% annually), so I definitely am not interested in Sysco at the same valuation with zero profit growth.

    We’ll see, though. I hope they turn it around. 🙂

    Best wishes.

  52. M,

    Thanks for dropping by!

    You’re right. There are only so many opportunities out there. And every stock is competing for my capital. Unfortunately, SYY just doesn’t seem competitive here. Even if they do turn it around, the business has to catch up to the valuation. Just my take on it.

    Cheers.

  53. DD,

    Well, that’s what makes it a market. Always a buyer and always a seller. 🙂

    I think they had a much wider economic moat back when I invested in the company, but the deterioration of the business has eroded that. Morningstar seems to agree, but we’ll see.

    They could very well turn it around. I wouldn’t totally bet against that. But the valuation indicates that it’ll take some time for even a high-quality Sysco to really catch up to this price. In the meanwhile, I think I can do better elsewhere. I remember when I first started investing I would hear investors talk about never buying a stock with a P/E ratio above 20, unless there was substantial growth behind it. Now, it seems people don’t blink an eye with a stock trading at 25 or 30 times TTM earnings. I think that’s something to be careful of.

    Thanks for dropping by!

    Best regards.

  54. syy has tried my patience add well. It seems the relatively low yield does not come with stellar dividend growth. I’m not sure if I’m ready to sell the company, but I’ll have to give it serious thought. Thanks for sharing your rationale!

  55. Good decision, Jason.

    That being said, considering your reasoning I’m quite surprised you still hold a company like TGT. No earnings growth, horribly overvalued and not much room left to raise the dividend. This combination is more than underwhelming when it comes to utilizing your money.

  56. Spoonman,

    I hear you. I’m a patient guy, but I kind of ran out with this one. It’s got a great market share, and will surely grow that share if the acquisition goes through. I just don’t know if a large market share of food distribution is really where I want to be. Tough to say. I hope they turn it around, and if they do I’ll be happy to give it another shot. All in all, it was a small investment.

    Thanks for dropping in!

    Best wishes.

  57. Klaus,

    TGT is interesting. I didn’t expect it to run up so much so quickly. I do, however, think its P/E ratio is being skewed. I’ve discussed that a few times already, though if you’re looking for a different take on that:

    http://seekingalpha.com/article/2702515-the-thing-about-targets-high-earnings-multiple

    I think, like SYY, TGT’s core business might take a little while to catch up to the price here. It’s demonstrated a much greater ability to grow both its earnings and dividend at rather attractive rates over long periods of time in comparison to Sysco, but there’s no doubt it’s facing some headwinds. We’ll see. It’s probably one of the very few other stocks in my portfolio that I might be willing to let go. The other being ARCP as a tax-loss play.

    Best regards!

  58. Don’t fall in love on your stocks! No soube on that!

    Just for open some discussion here, how do You evaluate RE and PL these days?

    Cheers!

  59. Thanks for posting, DM.

    Very interesting read for me; I’ve had SYY on my watchlist for over five years and never pulled the trigger…. I’ve been waiting for a better valuation or, as you indicated, for operations to improve. Their dividend track record is what initially attracted me to them and I’ve taken note of their trucks going by me on the road or unloading at businesses for years.

    Interesting to see you unload shares you’ve held for so long, but as you said, the opportunity cost is the real risk here. With a payout ratio that high and weak organic growth options, you likely made the right choice.

    – Ryan from GRB

  60. Good read,

    I now have a reason to sell SYY and add UL (along with rebalancing my portfolio). Thank you for the in-site.

    I’ve finally started receiving dividends every other day or so. And it just makes me want to invest more and more. I can’t wait til I have a portfolio similar to you.

    What’s your take on the oil “crisis” (if you could even call it that yet)?

    Congrats on the profits, have a good rest of the weekend.

  61. Thanks for replying, Jason. Unfortunately, I can only read the first page of the SA article. Glad to know though that you’re aware of the critical state of TGT. It’s actually a pretty popular stock among DGIs, which I find rather confusing.

  62. Nuno,

    Unfortunately, I don’t follow RE or PL. I’m guessing RE is Munich RE? If so, it doesn’t trade on one of our exchanges.

    Wish I could help you more there, but perhaps someone else will add some color commentary. 🙂

    Cheers!

  63. GRB,

    I notice a lot of people watch SYY but haven’t actually invested in the company. That’s probably because of the lackluster fundamentals, which makes sense. I got lulled in by the growth, but that was a bit of a sucker play. Oh, well. I did okay, considering the circumstances. But it’s definitely the opportunity cost, and I feel better opportunities exist than a 3% yielder with ~3% dividend growth, a high payout ratio, and no growth. That’s just me.

    Thanks for dropping by!

    Best regards.

  64. Steve,

    Nice job there. Receiving dividends that often sure makes the game a lot funner and a lot easier. Keep it up! 🙂

    I don’t think we’re anywhere near an oil crisis. Could fall substantially lower though, especially if production is increased to meet bottom lines (especially a risk from certain poorer OPEC members). All in all, I think the world will still run on O&G 10 years from now and beyond. Thus, I’m happy to buy high-quality energy companies on the cheap along the way, assuming available capital and room in the portfolio.

    Cheers!

  65. Greetings, excellent read, I am a relatively new fan. What were the initial indications that you should sell that started the research? In other words, you mentioned that dividend investing isn’t time consuming, so I am guessing that you don’t do such a careful analysis of every stock on a weekly basis.

    Thanks!

  66. PTS,

    Well, there was no specific impetus. Rather, just a slow and steady decline in the business’s operations that eventually tried my patience. I actually probably should have sold a while ago, but I wanted to give them the benefit of the doubt. I know they’re not going out of business any time soon, and so I wanted to see if they could turn it around at some point. But it was really this latest dividend increase that was announced a couple of weeks ago or so that finally made me throw in the towel.

    Thanks for stopping by. Hope you find some value in the content.

    Cheers!

  67. Well done.Iwas sleeping with somany stocksto wartch. Will besoldtoday. The price is overblown nos. Thanks. Ido not ser it asyour worst investment.

    Good to you

  68. Perhaps quite an oversimplification on my part, but I have no problem selling a stock (for a gain) if you turn around and re-invest that money in something that you reasonably think is going to make a bigger/stronger gain in the future. While I, of course, hate unnecessary broker fees, at the end of the day I think it is wise to occasionally “trim the weak” and use those resources to attempt to “add more strong.”

  69. Aspenhawk,

    Sysco make work for others. I certainly think it’s a pretty decent company. But it was a more decent company at a cheaper valuation back when I initiated a position in the company. It’s since become less decent while simultaneously becoming more expensive. The gap between quality and value widened until it seemed completely unwarranted, in my view.

    Cheers!

  70. TGGD,

    Right. That’s certainly a good strategy there. It’s difficult, however, to know for sure that what’s been weak in the past will remain weak going forward. Likewise, it’s difficult to know if what’s been strong in the past will remain strong in the future. And that all speaks to investing in general, as we’re really making bets on companies. I also hate unnecessary fees and taxes, and Sysco could very well turn it all around and do really well. So I hate casting off a pretty decent company, but four years of poor performance is certainly not a great start for a long-term partnership with a company. Perhaps I didn’t give it long enough, or perhaps I should have went elsewhere a while ago due to opportunity costs. All in all, I have no regrets. It’s just not a business that’s good enough for me at this point in time. Certainly willing to revisit the idea in the future if operations markedly improve while at the same time the valuation on shares comes way down.

    Cheers!

  71. DM,

    You have provided a thoughtful and reasoned position. Perhaps a part of their ‘deteriorating fundamentals’ are due to regulatory positioning related to the merger? Anyway, following the merger I’ll review the situation to determine if any portfolio repositioning is in order, particularly in light of the asset sale rumor to PFG (owned by BX in which I also have a stake.)

    Anyway, I do have one question related to the timing of your sale. Since your decision was made after the dividend announcement, was there any thought to selling after ex-div which would’ve pushed your gain into the 2015 tax year and capturing one additional div payment?

    Regards,

    Charlie

  72. Charlie,

    Hmm, that’s an interesting thought. But their fundamentals started deteriorating years ago, before this merger was even in sight. Certainly a major asset sale would change the game for them, but a future transaction like that has no bearing on past results.

    I didn’t contemplate waiting on the sale for the next dividend, though SYY is a very small payer for me. This was a thought process that had been going on for some time now, so I’ve already kind of waited for that “next dividend” many times now. It had just come to the point to where I couldn’t really justify being an investor in the company any longer. I couldn’t (and still can’t) believe investors were willing to pay more than 25 times earnings for a company that’s contracting and sports razor thin net margin. Visa was available for 25 times earnings not all that long ago. Different companies, but I’d be willing to bet the latter is worth paying far more than the former, yet their spread isn’t that great.

    I hope that helps! Thanks for dropping by. 🙂

    Cheers.

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