For most investors, Bunzl (LSE:BNZL) probably isn’t a household name. But it’s handily outperformed the FTSE 100 over the last 10 years and I think there’s more to come.
Past performance isn’t a guarantee of future success. But whether it’s growth or income, the company’s a lot to offer investors.
Income
The success of any investment comes down to the cash it generates. And one of the things Bunzl does better than most businesses – FTSE 100 or otherwise – is generate cash.
In general, a lot of the company’s operating income becomes free cash. This can then be used either to fund growth or returned to shareholders via dividends.
Bunzl operating income vs. free cash flow 2014-24
Created at TradingView
On the latter point, Bunzl has an excellent record. The firm’s increased its dividend consistently over the last 10 years, including during the Covid-19 pandemic.
At an average of 7% a year, these haven’t just been token increases. The company’s been growing its dividend at a meaningful rate, even during a challenging economic environment.
Bunzl dividends per share 2014-24
Created at TradingView
Growth
Dividends only account for around half of the firm’s earnings though. Management’s used the rest of the company’s net income to reinvest in future growth opportunities.
Acquisitions have been key to Bunzl’s growth, which has resulted in revenues growing at around 7% a year. But this can be risky for even the most experienced investors.
Warren Buffett’s probably the best in the business when it comes to investing. But the Berkshire Hathaway CEO has been known to overpay for acquisitions.
Investors would therefore be unwise to overlook this risk when considering Bunzl shares. But I think there are some important considerations that help offset this.
Capital allocation
Since 2014, Bunzl’s reinvested just over half of its net income. And while its revenue growth’s been impressive, there are also signs it’s been deploying cash carefully.
One of these is the company’s return on equity. This helps measure how well management generates returns with the cash it retains on its balance sheet.
Bunzl Return on Equity 2014-24
Created at TradingView
It’s worth noting that this metric’s dropped recently. But I think this looks like a temporary issue for a business that’s consistently maintained high returns.
Moreover, despite this falling to 18.5%, it’s still well ahead of the 11% average for the FTSE 100 as a whole. In other words, Bunzl’s still doing very well in terms of profitable growth.
Outlook
Overall, I think Bunzl’s a terrific business with an impressive track record. Furthermore, its big competitive advantage – the unmatched scale of its operations – should help it continue to do well.
Right now, the stock’s slightly higher than the level I’d like to buy it at. But if the share price finds its way back to £32, I’ll be looking to add it to my portfolio.
The post Here’s why Bunzl’s my favourite FTSE 100 stock for growth and dividends appeared first on The Motley Fool UK.
Pound coins for sale — 31 pence?
This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
More reading
5 dividend-growth shares that Fools believe could deliver generational wealth
Up 18% and 12% in a month, but I think these stunning FTSE 100 shares can keep climbing!
How much do I need to invest in dividend stocks to earn a £10,000 second income?
2 FTSE 100 stocks I’d buy for passive income during a recession
2 low volatility FTSE 100 shares that’ll help me sleep soundly at night
Stephen Wright has positions in Berkshire Hathaway. 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.
