Why buying Sysco Corporation (NYSE:SYY) for its upcoming dividend might not make sense

Regular readers will know we love our dividends at Simply Wall St, which is why it’s exciting to see Sysco Company (NYSE: SYY) is set to trade ex-dividend in the next four days. The ex-dividend date is one business day before the record date, which is the deadline by which shareholders must be present on the books of the company to be eligible for payment of a dividend. The ex-dividend date is important because each time a stock is bought or sold, the transaction takes at least two business days to settle. So you can buy shares of Sysco before March 31 in order to receive the dividend, which the company will pay on April 22.

The company’s next dividend payment will be $0.47 per share. Last year, in total, the company distributed US$1.88 to shareholders. Based on the value of last year’s payouts, Sysco stock has a yield of about 2.3% on the current share price of $80.91. Dividends are a major contributor to investment returns for long-term holders, but only if the dividend continues to be paid. So we need to consider whether Sysco can afford its dividend and whether the dividend could increase.

Check out our latest analysis for Sysco

Dividends are usually paid out of company earnings, so if a company pays out more than it has earned, its dividend is usually at risk of being reduced. Sysco has paid out 121% of its earnings over the past year, which we believe is generally not sustainable unless there are mitigating characteristics such as unusually high cash flow or a large cash balance. A useful secondary check can be to assess whether Sysco has generated enough free cash flow to pay its dividend. It paid out 110% of its free cash flow as dividends last year, which is outside the comfort zone for most companies. Businesses generally need cash more than revenue – expenses don’t pay for themselves – so it’s not great to see them paying so much out of their cash flow.

Cash is slightly more important than earnings from a dividend perspective, but given that Sysco payments were not well covered by earnings or cash flow, we would be concerned about the sustainability of this dividend.

Click here to see the company’s payout ratio, as well as analysts’ estimates of its future dividends.

Have earnings and dividends increased?

Stocks with stable earnings can still be attractive dividend payers, but it’s important to be more conservative in your approach and demand a greater margin of safety when it comes to dividend sustainability. If business goes into a recession and the dividend is cut, the company could see its value drop precipitously. With that in mind, we’re not thrilled to see that Sysco’s earnings per share have remained virtually flat for the past five years. It’s better than seeing them fall, sure, but over the long term, all the best dividend-paying stocks have the potential to significantly increase their earnings per share.

Many investors will gauge a company’s dividend yield by evaluating how much dividend payouts have changed over time. Over the past 10 years, Sysco has increased its dividend by about 6.1% per year on average.

The essential

Should investors buy Sysco for the upcoming dividend? It has been unable to generate earnings growth, but pays out an uncomfortably high percentage of its earnings (121%) and cash flow (110%) in the form of dividends. It’s not the most attractive proposition from a dividend perspective, and we’d probably pass this one up for now.

So if you’re still interested in Sysco despite its low dividend qualities, you should be well-informed about some of the risks this stock faces. For example, we found 3 warning signs for Sysco (2 not to be overlooked!) that deserve your attention before investing in stocks.

If you are looking for good dividend payers, we recommend by consulting our selection of the best dividend-paying stocks.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.