At first sight, Bunzl (LSE:BNZL) shares look overvalued – the stock trades at a price-to-earnings (P/E) ratio of 22 and earnings per share are falling. But a closer look reveals a different picture.
I think the FTSE 100 distributor is in better shape than its headline numbers suggest. And when this kind of thing happens, I like to take a closer look to see if there’s an opportunity.
Falling earnings
Let’s start with the falling earnings. Bunzl’s reported earnings per share went from 157.1p in 2023 to 149.6p in 2025, but investors should take a closer look at what’s going on here.
The FTSE 100 company sold off its Argentina business last year, which resulted in currency translation losses. But these are likely to be one-off and therefore a temporary setback.
Leaving this aside, EPS grew slightly. And adjusting for fluctuations in foreign exchange rates (which should normalise over time) they were up 5.5%.
On this basis, EPS came in at 194.3p. That implies a P/E multiple of around 16 – with the potential for significant growth to come.
Growth
In terms of growth, Bunzl has a positive outlook for 2025. This is set to come from both growth in its existing businesses as well as the acquisition of new ones.
Over the long term, relying on acquisitions to drive growth can be a risky strategy. There’s always a danger of overpaying for a business and this can destroy value for shareholders.
Bunzl claims to have a promising pipeline for the year ahead, but this doesn’t eliminate the risk. And as the company grows, it becomes more difficult to find big enough opportunities.
Investors might, however, think the firm doesn’t have to grow indefinitely for the stock to be a good investment. Its outstanding record of shareholder returns could reduce the overall risk.
Shareholder returns
Bunzl has grown its dividend each year for the last 32 years. And these are not token increases – in 2024, the distribution was 8.4% higher than the year before.
Based on the current share price, that’s only a 2.3% yield. But investors stand to get just under another 2% return in 2025 through a £200m share buyback, which is currently in progress.
More generally, Bunzl has an ongoing policy of deploying £700m per year. If this can’t be used for growth opportunities, it’s to be returned to shareholders through dividends and buybacks.
This is around 6.5% of the firm’s current market value and it’s being funded by the cash the company generates, not by taking on debt. That’s something for investors to think about.
Undervalued?
A lot of the time, the best opportunities come from seeing something other investors are missing. And this might be the case with Bunzl shares at the moment.
I suspect a P/E ratio of 22 means a lot of investors aren’t going to take much notice. But I think the stock is good value and I’m keeping it on my list of stocks under consideration.
