Looking into Sysco

Sysco (SYY) is the largest food distributor in North America. Sysco provides products and services to restaurants, hospitals, schools, hotels and nursing homes. The company operates 186 distribution facilities from which it distributes products such as frozen foods, meats, fruits, vegetables, fully prepared meals and non-food products such as kitchen and cleaning supplies. No single customers accounts for more than 10% of sales. Sysco’s strategy is to grow via acquisition. Since its inception, Sysco has acquired about 150 companies.

Strengths
1. Sysco is the leader in this fragmented industry with a 17% market share. No other competitor has more than 10% of the market.
2. Since becoming a public company in 1970, Sysco has rewarded shareholders with 40 years of consecutive dividend growth.
3. Sysco has a strong balance sheet and has been able to generate a ROE in excess of 30% for most of the past decade.

Weaknesses
1. Low profit margins are the hallmark of this industry. Sysco’s profit margin over the last ten years has averaged around 3%.
2. Restaurants accounted for 62% of Sysco’s revenue last year. Sysco is susceptible to a slowdown in this segment during a weak economy.
3. Sysco is a low beta, defensive stock that lacks torque to the economic recovery. Sysco will most likely be a laggard during a prolonged bull market. Sysco’s earnings are only expected to grow 5-7% per annum.

Investment Rationale
Sysco is a good long-term investment due to its strong defensive characteristics coupled with its leading market share position and strong return on equity. The shares should outperform in a sideways or weak market. Sysco sports an above average dividend yield of 3.6% and has delivered annual dividend increases for the past 40 years. Given that the shares are almost fully valued at current levels, investors can expect a modest total return of 10-15% in the next 12 months. I have a $30 price target on the shares.

Transition Year at Suncor

Suncor Earnings Disappoint: Suncor shares have taken a beating this week as the company reported earnings that were significantly below analyst expectations. It seems that Suncor is having troubles digesting its Petro-Canada acquisition as the company decides which assets to keep or sell. The theme for 2010 will be about realizing the benefits of the merger. Once it finishes that, the board of directors will “start to consider dividend increases beginning next year”, CEO Rick George said.

The analyst community still views Suncor favourably as several analysts are keeping their price targets around $40.

New Innergex

By Richard Blackwell, Globe and Mail

Investors looking for a pure-play, mid-sized Canadian renewable energy company will have another place to put their money, now that Innergex Renewable Energy Inc. and its income trust arm are planning to merge into a single entity. The Quebec-based corporation said yesterday it is combining with Innergex Power Income Fund, a trust in which it holds a 16% stake.

The merged operation, which will use the Innergex Renewable Energy name and stock symbol, will together own 14 hydroelectric plants and three wind farms, in Quebec, Ontario, British Columbia and Idaho. There is also a pipeline of projects under development.

The simplified corporate entity will not only be a larger and more liquid asset for investors, it will also eliminate the trust structure and along with it any worries about the end of tax breaks that many trusts will face in 2011.

"By this transaction we're leaving behind all the uncertainties that were created under the trust structure," chairman Jean La Couture said on a conference call with analysts. Both entities are currently run by the same management group.

In the transaction, the trust's unitholders will get 1.46 of the combined company's shares for each unit they own. The dividend to be paid to those unitholders by the merged company will be roughly equivalent to what they are getting now in distributions. Current shareholders of the corporate entity will see their holdings unchanged, but they will start to collect dividends.

While the combined business will eventually be taxable, the company has access to about $750-million in tax credits which should keep it from having to pay anything until at least 2018.

Hershey Ups Dividend

The Hershey Company (HSY) announced a dividend increase of 7.6% today. Hershey has increased their dividend in 12 of the last 13 years (2009 was the exception). The company reaffirmed its outlook for growth in net sales of 3-5% and an increase in earnings per share of 6-8% for 2010.

January Recap

2010 is off to a great start as several prominent TSX companies have increased their dividend payments to shareholders.

• ATCO: 6.0% increase
• Canadian Utilities: 7.1% increase
• CN Rail: 7.0% increase
• Fortis: 7.7% increase
• Metro: 23.6% increase
• Shaw Communications: 5.0% increase

Keep an eye on Rogers Communications as they are expected to increase their dividend by 10% - 20% when they report on February 17.

Remember: Dividend Investors are not concerned about fluctuating share prices. What we care about is increasing our cash flow from our portfolio year after year.

CN Rail Increases Dividend

Canadian National Railway (CNR) reported that profits increased to $582 million in the fourth quarter despite lower revenues. The railway increased its quarterly dividend to $0.27 per share. This represents an increase of 7% from the previous dividend.

CN Rail has increased their dividend every year since becoming public in 1995.

Metro Raises Dividend

Metro (MRU.a) increased their dividend by 24% on the back of solid Q1 results. Metro's new quarterly dividend is $0.17 per shares. The shares currently yield 1.7%. Metro has increased its dividend for the 15th consecutive year.

Reaching for Yield

Don't let your search for yield blind you to risk

Tom Bradley is president of Steadyhand Investment Funds.

There's no question about it. The defining feature of the capital markets right now is the search for more yield. Individuals are doing it. Institutions are doing it. And new product development is totally focused on it.

I get an e-mail almost every day announcing a new fund with income in the name. I'm trying to convince my partners that we need to come out with a product that has it all – the Steadyhand Enhanced Global High Yield and Growing Dividend Weekly Income Fund, or SEGHYGDWIF for short.

With low-risk securities yielding next to nothing, investors are moving up the risk scale. Instead of a guaranteed investment certificate (GIC) that yields 3%, they're buying Brookfield bonds, BCE preferreds or BMO shares that yield 5 to 6%. This is an asset mix shift that brings with it credit risk – the risk that the issuer of the bond or preferred can't make the payments – and equity risk. Income Trusts, REITs and dividend-paying stocks all have the potential to go down in price.

Holding a diversified portfolio certainly decreases the chance that a default or stock market decline will meaningfully affect long-term returns, but it still brings with it more volatility. For investors in the accumulation phase, volatility is not a risk, but rather an opportunity – when stocks are down, they can buy more. For investors living off their portfolio, however, it's a different matter. Making withdrawals when markets are down means eating into capital, which leaves a smaller asset base to ride back up with and generate future income.

In most cases, “reaching for yield” is perfectly appropriate and works out well, but the expression always makes me uneasy. That's because the risks attached to “reaching” are not always obvious and tend to creep up on investors. If income is flowing and the strategy is working, they don't see the risk. They only know it's there when things stops working. We can go back a few years to when fixed-income investors shifted from bonds to income trusts. They were ecstatic about the extra income until they ran into distribution cuts and abrupt price declines.

Also, when there's a lot of reaching going on, it usually means that high-yielding securities are getting overpriced. Again, the early trust market was an example of this. These securities were getting priced off their yield – the higher the better – with little regard to what the underlying businesses were worth.

As the old saying goes, “More money has been lost reaching for yield than at the point of a gun.” Income-oriented securities are no different than other types of investments. The price has to make sense, no matter how great the need.

First Capital Realty

First Capital Realty (FCR) acquires, manages and develops staple-goods-oriented neighborhood and community shopping centres. It has interests in 182 properties in Canada.

Defensive Retail: First Capital focuses on major urban markets with strong population and economic growth. Management believes that location is the single most important factor in acquiring real estate. First Capital builds critical mass in each target market to generate economies of scale and operating synergies. First Capital  focuses on supermarket and drugstore-anchored neighborhood shopping centers in high-density locations that have barriers to entry. More than 82% of its properties are anchored by supermarkets and/or drugstores. Management believes that these tenants are more resilient to economic cycles and have rental income stability. This strategy has yielded positive results, as First Capital has consistently increased its dividend per share.

Major Tenants Include:

First Capital is a BUY and can be considered a good alternative to RioCan.

Retail REITs

Within the REIT universe in Canada, conservative investors should look at REITs that focus on retail properties such as shopping malls and grocery-anchored shopping plazas. Retail REITs offer stable income derived from the strength of their tenants. The best Retail REITs have properties that are anchored by stores that cater to everyday shopping such as grocery stores. These properties have a steady flow of customers in good times and in bad.

With Real Estate, it is all about

Location, Location, Location.

RioCan’s properties are mainly located within Canada’s six major high growth markets: Toronto (35% of rental revenues), Montreal (11%), Ottawa (9%), Calgary (6%), Vancouver (4%) and Edmonton (3%). RioCan recently began pursuing opportunities in the U.S. RioCan is the largest REIT in Canada by market cap.

First Capital generates approximately 90% of its revenues in Canada’s largest cities. Ontario makes up over 45% of First Capital’s portfolio, while the Greater Toronto Area alone accounts for 27% of the portfolio. The Montreal area represents 18%, and Calgary/Edmonton/Red Deer account for 20%. Technically, not a REIT, First Capital is structured as a Real Estate Operating Company (REOC).

Calloway is often dubbed the "Wal-Mart REIT" due to the fact that Wal-Mart anchors 76% of their locations. The portfolio has exposure to all ten provinces, while its largest concentrations, as measured by gross revenue, are in Ontario (59%) and Quebec (14%). Most of their properties were built in the last ten years.

Primaris’s properties consist of enclosed shopping malls and are located in 20 markets within seven provinces. Ontario represents 42% of the REIT’s portfolio of which 20% is located in Toronto. Quebec makes up 14% of the portfolio, while British Columbia and the Prairie provinces respectively make up 15% and 28% of the portfolio. Primaris was spun out of the OMERS pension plan in 2003.

Crombie, the "Sobeys REIT", is 47% owned by Empire Co (Sobeys parent company). The portfolio is heavily weighted towards Atlantic Canada and Newfoundland (75%), with the remaining portfolio in Ontario (17%) and Quebec (8%). Sobeys occupies 33% of Crombie's GLA.

Remember, the best time to buy a REIT is when it is trading at a discount to Net Asset Value (NAV).