It’s Time to Sell This Dividend Growth Stock

As we’re about to enter a new year, I’d like to take a moment to look back on another year that was particularly eventful – 1976.

It’s the year the United States celebrated 200 years of independence from Great Britain… Gerald Ford was defeated by Jimmy Carter – the first president to introduce everyday Americans to the phrase “stagflation.”

The Dow Jones Industrial Average closed the year at 1,004.65, a gain of 18.86% for the year. The S&P did even better, finishing at 107.46, up 19.15% over the previous year.

[ad#Google Adsense 336×280-IA]1976 also happened to be a good year for people named Steve…

Steve Wozniak and Steve Jobs co-founded a small business in a garage in Los Altos, California – a company that would later make them wealthy beyond belief.

The Steve Miller Band had a good year, too, when their album Fly Like an Eagle went quadruple platinum.

You’re wondering what any of this has to do with investing in dividend stocks, right?

It turns out that Steve Miller wrote a song that embodies an investment mantra that applies to dividend investing today…

Double-Digit Gains in a Dividend Stock

In the October [12] edition of Dividends & Income Daily, we published a list of four recommended dividend payers that were likely to raise dividends in the near future.

One of those stocks, Sysco (SYY), came with a 44-year history of increasing dividends. And as our readers know, we love dividend payers that increase their dividend payments every year.

It’s what separates the wheat from the chaff, after all!

Well, on November 15, Sysco increased its dividend from $0.28 to $0.29 – an increase of 3.57%.

And if you heeded our advice, you profited from the trade rather handsomely, as the stock rose nicely on the news.

Something else happened that sent stocks even higher, though.

On December 9, Sysco announced a merger with U.S. Foods. Valued at more than $8 billion, the deal has been approved by both boards and is expected to close in Q3 2014.

On this news, the stock ran up another 25% from its October levels, reaching a high of $43.40 in intraday trading.

The stock recently settled around $36.15 per share, which represents a gain of more than 11.9% since our recommendation – resulting in a 12.82% total return.

Sadly, however, the party might be over.

Time to “Take the Money and Run”

Buying dividend stocks is just half of the equation in creating wealth.

The other half is knowing when to sell…

And it’s clear that it’s time to heed Steve Miller’s prescient advice and “take the money and run.”

Sysco has made a major move, both in its stock price and in its merger with U.S. Foods.

And while the deal can be a winner for Sysco in the long run, the uncertainty over the merger in the coming months will create significant headwinds for the stock in the near term.

The problem is, Sysco will face pressures from anti-trust regulators, as the company will dwarf its competition. As it stands, Sysco will control nearly 30% of the food services industry.

In contrast, the company’s next biggest competitor, Performance Food Group, has a 5% share of the market. This will lead regulators to require significant divestitures from Sysco to appease everyone.

Another concern is that the company’s shares were up only 8.4% before the merger news, during which the S&P 500 increased more than 25%. Sysco has lagged the market for some time, and this doesn’t bode well for the stock in the near term.

And with this run-up, Sysco is approaching a resistance level that the stock is unlikely to push through.

Lastly, Sysco has agreed to assume a whopping $4.7 billion of U.S. Food’s debt. This will require Sysco to do everything exactly right – and that’s a hard sell in a merger this size, especially in an uncertain interest rate environment.

Wait, There’s More…

In addition, higher food prices have hurt the food industry in general, and the restaurant business specifically. These are Sysco’s core constituents.

The company’s profits in the fiscal year ending June 29 declined 12% to $992 million. While total revenue increased by 5% to just over $44 billion – resulting in a net operating margin that’s 33% lower than the 2012 industry average.

Tack on the uncertainty over buying a company from a private equity firm – along with their oftentimes murky financial controls – and it all adds up to an uncertain future.

The takeaway here is that a gain of 12.82% in a couple of months – in a safe dividend stock – is the stuff of lore… Be happy with it!

After you cash out, I recommend using a portion of your profits to buy Steve Miller’s album.

Safe (and high-yield) investing,

Louis Basenese

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Source: Dividends and Income Daily