If you look at Bunzl (LSE: BNZL) and nearly fall asleep thinking about the company’s business model, I don’t blame you.
The company is one of the world’s leading distribution groups, supporting enterprises all over the world with a variety of products. These products are generally not big-ticket items, but they are generally essential in the everyday running of businesses.
Items such as first aid kits, domestic and industrial cleaning products, supermarket packaging, and health and safety equipment. Not exciting, but must-haves that provide a predictable and steady income stream for the firm.
The business is also fantastically well run. For the past decade-and-a-half, Bunzl has churned out consistent growth year after year and organic growth has been supplemented by choice acquisitions of family businesses. Over the past 14 years, the company has acquired 150 small firms to add to its offering. And there’s no sign that this business model will falter any time soon.
Growing the business
Bunzl’s size and leading market position mean that it can achieve margins competitors can only dream of. In the last financial period, the company reported a return on invested capital (ROIC), a measure of profit for every £1 invested in the business, of 16% and a cash conversion ratio of 97%. Looking at these metrics it should come as no surprise that since 1992, Bunzl has been able to increase its dividend per share at a compound annual growth rate (CAGR) of 10%. Since 2004, adjusted earnings per share (EPS) have grown at a CAGR of 11% and the CAGR of the group’s revenue is 10%.
CEO Frank van Zanten has no plans to deviate from this strategy any time soon. Even though Bunzl has spent a total of £3.1bn buying companies to fold into its empire since 2004, it has only touched the surface of the global distribution network. And as the group increases in size, its growth should only accelerate.
Economies of scale should mean that profit margins widen and this means the group can offer customers better deals. Improved cash generation will free up more funds for acquisitions, helping grow revenues, improve margins and boost profits. Like a snowball rolling down a snow-covered mountain, Bunzl is just getting bigger and bigger.
Shareholders profit
Its consistent profit growth has generated steady returns for investors. Since 2008, the stock has produced an average annual total return of 14.5%, easily beating the FTSE 100’s average annual performance of around 8% over the same period.
As long as the firm maintains its strict acquisition policy, I reckon shareholders can expect these double-digit annual returns to continue for many years to come.
With this being the case, if I had to buy just one stock today to hold for the rest of my life, it would be Bunzl. The company’s current dividend yield of 2.1% and valuation of 18 times forward earnings might not look attractive, but based on its historical performance, I think it’s worth coughing up to be part of Bunzl’s growth story.
