This "Forever" Stock is up 13,000% in 40 Years... and it's STILL a Great Investment

Tim Begany's picture

Friday, April 6, 2012 - 10:00am

by Tim Begany

I must confess to being very envious of a retired couple I know, because they're long-term investors in one of the best stocks of the past half century. Shares of this company are up a whopping 13,000% since the couple scraped together their $250 investment in June 1972, about 40 years ago.

The company was still very new back then, having only gone public a couple years before, so my retirees had the chance to buy in at a split- and dividend-adjusted price of $0.23 a share. And they did, on the advice of a close relative, now deceased, who was a local stockbroker with a long history of spotting great companies while they were still in their infancy.

After that, they simply held.

Today, their investment is worth about $32,000 -- good for a 12.9% annualized rate of return.


 

The company they invested in, Sysco Corp. (NYSE: SYY), isn't finished, though.

Far from it. This well-known supplier of food and equipment to restaurants, hospitals and other foodservice industry participants is still a highly dependable performer that should continue delivering solid returns for a very long time -- with a lot less volatility than the overall market. And I know the retirees I mentioned love the dividend, which has risen for 42 years straight and, at $1.09 a share right now, is good for a yield of about 3.7%.

Because it's so reliable, Sysco is what I'd call a "Forever Stock," a term we use at StreetAuthority to describe stocks that have excelled for decades and are practically worth holding forever.

Dominance is a key feature of any Forever Stock, and Sysco's got plenty. With a 17% market share, it's by far the largest food-service distributor in North America, where it does virtually all of its business. The closest competitor is U.S. Foodservice, Inc., a privately-held company with a 9% market share. No other competitor controls more than 5% of the foodservice industry.

Because foodservice is a low-margin industry -- Sysco's operating margin is 4.7%, compared with 4.2% for the industry -- keeping down costs is also crucial. And here, too, Sysco continues to innovate.

For instance, the company is evaluating delivery routes to make sure they're as efficient as possible. And it's building massive redistribution centers, like the 630,000 square-foot facility it opened in Schertz, Texas on March 13, to ensure as efficient service as possible to customers throughout North America. Management hasn't yet offered any estimates of how much this strategy will save, but I suspect it will trim costs and help the bottom line.

Sysco has historically been better than competitors at keeping a lid on costs, and this shows up in a metric I like to use known as return on equity (ROE). ROE is simply the amount a company makes as a percentage of "shareholder's equity," or "book value" (the value of the company's assets). It's considered essential by successful value investors such as Warren Buffett. Sysco's ROE of 26% is a full four percentage points better than the industry average of 22%. Said another way, this means that for every dollar the company has invested (in assets), Sysco makes $0.26 each year. Not bad at all...

Because Sysco is so dominant and diversified -- no single customer generates more than 10% of sales -- I agree with analyst projections for the company to keep growing revenue by a solid 6% annually for the next three to five years, just like it did the prior five. This would raise yearly revenue from $39.3 billion in 2011 to $59.5 billion in 2016.

I think estimates for earnings to rise by 7.5% a year, compared with 6.5% during the past five years, are on-target, too. This is because of Sysco's scale and superior ability to minimize costs. A 7.5% growth rate would increase earnings from $1.96 in 2011 to $2.81 a share in 2016.

I think the best Forever Stocks are the ones that offer a lot less volatility, in addition to solid returns. This certainly describes Sysco. The stock is typically about 40% less volatile than the overall market, falling only 23% in 2008 when the financial crisis hit, for example, compared with the S&P 500's 37% loss. And while you may or may not quite match the market when it has quick run-ups, it's important to take the long view with stocks like this one. You have to buy in knowing that you're getting an outstanding company with a history of outperforming over the long run -- with limited volatility.

Risks to Consider: Sysco is masterful at cutting costs, but it's not immune to rising food and commodity prices. Significant price increases could do serious damage to the bottom line. You'll want to keep tabs on this if you buy the stock.

Action to Take --> Despite its long run-up, Sysco still has plenty of upside. I think the stock could climb at least 40% in the next four or five years, based on projected earnings growth and the fact that investors have historically paid about 15 times earnings for the stock. If you multiply the historical price-to-earnings ratio by 2016's projected earnings of $2.81 a share, you get a share price of $42.43 (15.1 X $2.81 = $42.43). This is a 44% gain from the current stock price of about $29.50 a share.

Importantly, the dividend is projected to grow to $1.24 a share in the next five years, which would be good for a nearly 3% yield, based on the $42.43 share price I estimated. (And while that's not huge, it should certainly prove enough incentive for some investors to hang on if and when shares hit a speed bump, which will limit overall volatility.)

In my opinion, there's no doubt Sysco is a Forever Stock worth owning now. Because it's so stable, it would make a particularly strong addition to portfolios that are heavy on more speculative and volatile holdings. Barring some serious misstep by management that degrades the stock, which is unlikely, I suggest hanging onto it for as long as possible -- even forever.

Tim Begany does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.