Growth from international distribution and services company Bunzl (LSE: BNZL) has driven the stock around 70% higher over the past five years.
That performance compares to a rise of about 13% from the FTSE 100. So the business has beaten its index by grinding out steady improvements in trading.
Robust business progress
For example, over the half-decade, revenue has increased by 30% and that’s filtered down to a 55% improvement in normalised earnings.
The remarkable thing is the consistency. Bunzl’s like a machine that just keeps going. It seems to pump out modest increases in revenue, operating cash flow, and earnings year after year. Even the pandemic barely slowed down the progress of the enterprise.
Efficient execution of operations has helped to drive organic increases in turnover. The firm’s strategy of adding bolt-on acquisitions has also enhanced the expansion of the business.
Success is reflected in the dividend record. Shareholders have experienced steady incremental gains each year for yonks. Meanwhile, the compound annual growth rate of the dividend is running at just over 6%.
However, despite the positives, the share price has been weak since early September and I think the situation presents investors with an opportunity.
The business has been chugging along as usual. But a pause in the stock’s up-trend means it’s down a little over 7% and is now in the ballpark of 3,448p. That’s not much of a decline, but there may be a chance of better value now than previously.
On 24 October, a positive third-quarter trading update reported “improved” expectations for underlying revenue growth.
Chief executive Frank van Zanten reflected on “another” period of growth and said it demonstrates the ongoing strength of the company’s “compounding strategy and resilient business model”.
Acquisitions and spare cash
After 11 acquisitions this year, there’s still a pipeline of opportunities ahead. However, Bunzl has enough cash left over to engage in a £250m share buyback programme, which is in full swing.
Meanwhile, City analysts predict an increase in normalised earnings for 2024 of about 22% and almost 6% in 2025. On top of that, there’s likely to be a high single-digit percentage increase in the dividend both years too.
Things are going well for the business, but what may go wrong for new shareholders now?
Well, the company has proved its defensive credentials and tends to supply other businesses with goods they use themselves rather than what they sell on. However, Bunzl isn’t immune to general economic weakness and shocks. So any difficult times ahead for its customers may see earnings decline along with the share price.
On top of that, there’s some valuation risk here. The market knows Bunzl’s attractions and investors have pushed the shares and the valuation up. For example, the forward-looking price-to-earnings (P/E) ratio for 2025 is almost 17 and the anticipated dividend yield is around 2.3%.
Meanwhile, the FTSE 100 itself has an anticipated P/E of about 13.5 and a forward yield of around 3.5%.
Bunzl’s no bargain-bin proposition. Nevertheless, I see the stock as worth investors’ further research time and consideration on market dips and down-days, such as now.
