Distribution Masters

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Getting things where they need to go is an unloved business. However, there are some companies that excel at it and have rewarded shareholders with annual dividend hikes along the way. Genuine Parts (NYSE: GPC), Sysco (NYSE: SYY), and Cardinal Health (NYSE: CAH) are just such companies.

Widgets

There are companies that make things and companies that sell things. In the middle are the companies that get the widgets from the company that makes them to the companies that sell them. The distribution business isn't sexy and companies are always trying to cut out the “middle man.” In the end, however, it is hard to get the scale needed to make distributing your own products worthwhile.

Food Stuffs

This is particularly true in the restaurant industry. While large chain restaurants can justify their own distribution networks, smaller chains, mom and pop shops, and large but single location establishments like hospitals can't. So, they rely on a middle man like Sysco.

The company is the country's largest food distributor to food preparing establishments. It sells everything from vegetables to plastic spoons. Sysco has about 400,000 customers and over 180 locations throughout the United States, Canada, and Ireland. It has close to a 20% share of the U.S. food service distribution market.

Although the 2007 to 2009 recession has been a drag on the company's business, it hasn't stopped growing. Its niche is highly fragmented, so it has used the downturn and slow recovery to gain market share. Management claims that Sysco has accounted for about half of the industry's growth since the start of the century.

Revenues have been heading generally higher for a decade. The dividend has been increased annually for more than 10 years. Earnings have been more volatile and a little weak of late, but that should change as the economy improves. The range bound shares yield around 3% and would be a solid addition to an income portfolio.

Parts

Genuine Parts' biggest unit, at about 50% of revenues, is its NAPA auto parts business. The company's key ability is to supply parts to auto repair shops so they don't have to stock inventory. The company is a leader in the space.

It is so good at getting parts to where they need to go, however, that it has ventured out into other business lines. The list includes machine parts, electronic parts, and office supplies. Although each is different, they all involve the same key strength.

Despite a dip during the recession, the company's top and bottom lines have headed generally higher over the past decade. Its dividend has been increased annually for well more than 10 years. The shares have run up of late and now yield around 2.5%, so now isn't the time to jump aboard for income investors.

Growth investors, however, might want to take a look. This nation's car fleet is a bit long in the tooth and will likely lead to increased auto repair spending. Since half of the company's business comes from that sector, Genuine Parts looks set to benefit. Its other three businesses should improve along with the economy. Income investors should wait for a pullback and a yield in the 3% to 4% range.

Meds

Another distribution giant is Cardinal Health. The company is a middle man in the drug and medical supplies market, serving some 60,000 pharmacies, hospitals, and physicians' offices. The two big events at the company lately were the loss of a key customer and an acquisition that moves the company into the home delivery market.

These two events are related. After losing the customer, management realized it needed to branch out to make up for the lost business. With a notable distribution system in place already, adding home delivery was a logical fit. It also moves the company toward what is likely to be a more common theme in the health care industry—keeping patients out of medical facilities. This shift should be a key growth driver.

The top and bottom line should be a little volatile over the next year or so, which isn't surprising based on the two events above. However, the dividend has been increased annually for more than a decade. Although the stock only yields about 2%, that's actually not a bad valuation for this company. Indeed, the shares have been stuck in neutral for about five years. Growth minded investors might want to take a look.

Stuck in the Middle

Being the middle man is grunt work and nobody gives you accolades for doing it well. That said, Genuine Parts, Sysco, and Cardinal Health have all built major businesses on this very strength. And they look like they have years of growth ahead. All are worth watching, with Sysco and Cardinal health both at reasonably attractive levels right now.


Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Sysco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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