A Brief History of Sysco's Returns

Despite constant attempts by analysts and the media to complicate the basics of investing, there are only three ways a stock can create value for shareholders:                       

  1. Dividends.
  2. Earnings growth.
  3. Changes in valuation multiples.

In this series, we drill down on one company's returns to see how each of those three has played a role over the past decade. Step on up, Sysco (NYS: SYY) .

Sysco shares returned 42% over the last decade. How'd they get there?

Dividends pulled most of the weight. Without dividends, shares returned just 11% over the last 10 years.

Earnings growth was fairly strong. Sysco's normalized earnings per share grew at an average of 7.8% a year from 2002 until today. That's above the market average, and respectable given the gloomy state of the U.S. economy, particularly the restaurant industry.

But if Sysco's earnings were so strong, why were returns so low? This chart explains why:


Source: S&P Capital IQ.

Sysco's stock was grossly overvalued a decade ago. A decade of falling valuation multiples ever since has prevented most of the company's earnings growth from turning into shareholder returns. Put simply, the market doesn't value $1 of Sysco's earnings as much as it did in the past.

The good news is that, at around 15 times earnings, Sysco shares actually look like a fairly good value today. While the past decade has seen valuations contract, the coming decade could see stable, even expanding valuations, helping more of the company's earnings growth turn into shareholder returns.

Why is this stuff worth paying attention to? It's important to know not only how much a stock has returned, but where those returns came from. Sometimes earnings grow, but the market isn't willing to pay as much for those earnings. Sometimes earnings fall, but the market bids shares higher anyway. Sometimes both earnings and earnings multiples stay flat, but a company generates returns through dividends. Sometimes everything works together, and returns surge. Sometimes nothing works and they crash. All tell a different story about the state of a company. Not knowing why something happened can be just as dangerous as not knowing that something happened at all.

At the time this article was published

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