Are Bunzl shares a long-term bargain?

Our writer considers what the latest results from a FTSE 100 company tell us about its prospects. Is now the time for him to buy Bunzl shares?

| More on:
A man with Down's syndrome serves a customer a pint of beer in a pub.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

With another strong set of annual results released today (26 February) by Bunzl (LSE: BNZL), I have been reconsidering the investment case for the foodservice and janitorial supplies business. As a long-term investor, could Bunzl shares be worth adding to my portfolio?

Impressive performance

For me, the answer is yes – if I could buy them at the right price.

Bunzl has a long history of growing by acquisition. In an industry with lots of medium-sized local players, that is a smart way to grow, as long as the price is right. Last year alone it inked 10 new deals and has committed £1.7bn to acquisitions over the past four years. Today it announced a new UK acquisition and its first purchase in Finland.

Surprisingly, revenues actually fell slightly last year (despite the company calling them “resilient”) but most of that was down to exchange rate movements. The industry has experienced heavy inflation in recent years and that slowing down helps explain the lack of revenue growth.

When it comes to the bottom line though, the company’s performance was good. Operating profits, pre-tax earnings and basic earnings per share all grew by double-digit percentages.

Bright future

Bunzl has mastered a basic but effective business model.

Its customer base has high ongoing demand for items like disposable cups and cleaning supplies. The bigger its business gets, the more economies of scale Bunzl has. By offering a one-stop shop to customers, it has a competitive advantage over rivals.

The company is highly cash generative at the operating level. But free cash flows slipped last year by 9%. Acquiring companies is costly so can eat into cash flows. Last year saw a £667m cash outflow from financing activities, including £210m spent on dividends.

The dividend per share grew 9%. Bunzl shares have now recorded over three decades of annual growth in the shareholder payout, making the company a Dividend Aristocrat.

The financing costs of the acquisition model continue to pose a risk to cash flows. Slowing revenues are also a risk, although if revenues are flat but profits grow I do not see that as a problem.

I am upbeat about the long-term outlook for the business thanks to its proven strategy and large untapped customer market.

Valuing the shares

Last year’s basic earnings per share of £1.57 mean that Bunzl shares now trade on a price-to-earnings ratio of 20.

I think a quality business deserves a price premium to reflect that quality. However, after rising 31% over the past five years, I do not now see Bunzl shares as attractively priced. The current valuation offers me little or no margin of safety as an investor if the business runs into unexpected problems.

Although I would be happy to buy Bunzl shares at the right price, for now I will not be investing.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Bunzl Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

Investing freedom — but inside a pension

Strapped consumers might be cutting back on investing, but they’re still keeping up their pension contributions. The only problem? A…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Forget gold! I’d rather buy these 3 FTSE high-yielders in a Stocks and Shares ISA

Gold looks like a risky investment to me as the price hits an all-time high. I'm ignoring the fuss to…

Read more »

Young female business analyst looking at a graph chart while working from home
Growth Shares

This 55p UK stock could rise more than 300%, according to a City broker

This UK stock has fallen from above 800p to below 60p. But analysts at Citi believe it’s capable of a…

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

I think this FTSE 250 trust has all the right ingredients to lock in long-term profits

Today I'm examining the prospects of a private equity investment trust on the FTSE 250 that caught my attention recently…

Read more »

Young black man looking at phone while on the London Overground
Investing Articles

2 under-the-radar UK shares investors should consider snapping up

Two UK shares have caught the eye of our writer. She explains why investors should be taking a closer look…

Read more »

Investing Articles

Are these 2 ultra-high-yielding income stocks a good buy for me?

These two income stocks often split the debate amongst investors. So what does our writer think of them as potential…

Read more »

Senior woman potting plant in garden at home
Investing Articles

5% yield! This dividend stock could be great for my retirement

Our writer explains why this dividend stock appeals to her as she’s investing to build wealth to enjoy in the…

Read more »

A young Asian woman holding up her index finger
Investing Articles

I’d aim for a second income of £1,000 a month with this super-reliable dividend stock

I think a great way to build a second income stream is by investing in dividend stocks via a Stocks…

Read more »