With so much uncertainty surrounding Brexit, it’s impossible to predict what the future holds for the stock market. So rather than trying to guess at what could happen, I think the best strategy is to invest in stocks that will do well no matter what the future holds for the UK.
Distributing profits
A great example of the type of companies I’m talking about is distributor Bunzl (LSE: BNZL). The firm is a crucial supplier for many companies because it distributes things like cleaning products and paper plates for the catering industry. These are hardly the most exciting products, but they’re essential for businesses to function.
Where Bunzl excels is its size and experience in the sector. Distribution is a very low margin business, and most companies can’t compete with the sector’s biggest players, which includes Bunzl. The firm also has a good track record of completing and integrating bolt-on acquisitions, mostly smaller businesses that would benefit from being absorbed.
With its economies of scale and stream of acquisitions, Bunzl has been able to grow earnings per share at a compound annual rate of 9% over the past six years. City analysts don’t expect the business to slow any time soon either. Earnings growth of 26% is pencilled in for this year, followed by growth of 4% for 2020.
Right now, you can snap up its shares for just 15 times forward earnings, approximately 25% below its five-year average multiple of 20. There’s also a dividend yield of 2.7% on offer for income investors.
Booming growth
Bunzl’s earnings growth is impressive, but it pales in comparison to Mondi’s (LSE: MNDI) reported growth over the past six years.
This packing group has reported average earnings growth of 17% per annum over the past six years. Net profit jumped from €386m in 2013 to €824m for 2018. Unfortunately, City analysts are forecasting a slight decline in earnings over the next two years. Nonetheless, I believe that, over the long term, this company is exceptionally well-positioned to benefit from the rise in online shopping and global trade.
More importantly, Mondi is highly profitable. Its operating profit margin has averaged 12.9% for the past six years, compared to the average profit margin of companies traded on the London market of 8%.
Management has been investing some of the company’s profits back into the business to drive growth, but it’s also returning a lot of money to shareholders. The current dividend yield stands at 4.2%, and the dividend payout is covered 2.2x by earnings per share.
Today, you can snap up shares in this business for just 11 times forward earnings, a steal considering Mondi’s fat profit margins and its current dividend yield. Also, the stock has historically traded for around 15 times forward earnings. That implies there could be an upside of as much as 36% from the current price if the market decides to re-rate the stock.
