If I had to pick just one stock in the FTSE 100 to buy with £500, it would be dividend stalwart Bunzl (LSE: BNZL).
Most people haven’t heard of this company, and it’s no surprise why. The distribution business provides everyday necessities to workplaces and hospitality venues, such as cups and saucers, cleaning products and clothing. It’s one of those businesses that functions in the background, and people only really know it exists when something goes wrong.
This business model has been incredibly successful. The FTSE 100 company has paid and increased its dividend for over 20 consecutive years. Over the past six years alone, the group’s earnings per share have grown at an average annual rate of 14%.
Of course, past performance should never be used as a guide to future potential. However, when it comes to Bunzl, its success has been driven by its buy-and-build strategy.
Buy and build
Over the past few decades, the company has absorbed hundreds of small businesses. In the highly fragmented distribution market, Bunzl has swooped on these companies and then removed unnecessary costs by integrating them with the broader business.
This strategy has yielded tremendous results. And as long as management doesn’t get carried away, I think it will continue to produce results as we advance.
The company says it has as much as £1bn of capital to spend on acquisitions over the next few years. Management reckons there are over 1,000 smaller businesses that would fit into the group’s structure. Most of these are in the United States, where tax and regulatory changes could lead ageing owners to sell.
This growth potential is the reason why I’d invest £500 in the FTSE 100 company. It clearly has a growth roadmap in place and plenty of funding available to pursue acquisitions. Moreover, it’s spent the last few decades successfully pursuing a working strategy.
FTSE 100 company risks
Having said all of the above, I should note the distribution industry has razor-thin profit margins. This is a double-edged sword for Bunzl. Its size gives it economies of scale to achieve better margins, but it’s still at risk. A drop in sales, or increase in group financing costs, could eliminate those margins. Further, a bad acquisition and resulting costs from trying to put things right may send the group’s growth into reverse.
These are the risks and challenges I’ll be keeping an eye out for. In the worst-case scenario, if the company’s financing costs rise significantly, it could have to reduce its dividend. This would eliminate Bunzl’s illustrious dividend history.
Still, even after taking these challenges into account, I think the enterprise has tremendous potential. If its acquisition roadmap goes to plan, I believe my £500 investment will go far invested in this FTSE 100 growth stock.
