The Bunzl (LSE: BNZL) share price has had a strong run, up 30% in the past five years. The company’s distribution and outsourcing business seems to have gone from strength to strength since the oubreak of Covid.
But the shares fell after 2023 full-year results on 26 February. And we saw a 5% dip in early trading, despite a rise in profits.
Dividend growth
Revenue did slip by 2% in the year, to £11.8bn. But adjusted profit before tax rose 4.4%, with adjusted earnings per share (EPS) up 3.7%. On statutory measures, the increases were even higher.
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Bunzl saw its operating margin rise from 7.4% to 8%, to set a new record. The board has also bumped the full-year dividend by 8.9%, to 68.3p per share. That’s only a 2% dividend yield on the previous close.
But it does mark 31 consecutive years of dividend growth, which is a cracking track record. Progressive rises over the long term can be worth a lot more than a big yield that can’t be sustained.
Acquisitions
One thing stood out to me was its statement: “Net debt to EBITDA of 1.1 times provides substantial headroom for acquisitions and other capital allocation options“.
It came on the same day that Bunzl also announce two new acquisitions. The company has bought an 80% stake in Nisbets in the UK, and has also snapped up Pamark in Finland.
This can make good sense in times when stock prices are low, and firms can be bought for less than in better times.
A net debt to EBITDA ratio of 1.1 times does sound comfortably low. I just hope the company doesn’t push that “substantial” headroom for acquisitions too far.
Valuation
I rate Bunzl as one of those rare examples of companies who do something simple and do it well.
My main fear though, is the stock’s valuation. On an adjusted EPS basis, these results put it on a price-to-earnings (P/E) ratio of 17.3. With earnings forecast to rise only slowly in the next few years, I can’t help seeing that as fully valued.
The fact that the Bunzl share price fell on the morning of these results makes me suspect the market thinks the same.
The world’s supply chains, fuel prices, and shipping routes are all under quite a bit of pressure right now too. And there must be a risk of that all forcing costs up for firms like Bunzl.
Should the company have to pause its dividend rises, I think we could see the shares fall.
Verdict
Still, despite these fears, I reckon Bunzl has defensive traits in such an essential business. The firm operates business to business, and doesn’t sell to end consumers. And I think that gives it an extra bit of safety too.
When I look at stocks like Unilever, I see similar valuations. Perhaps these really are the “wonderful companies at fair prices” that billionaire investor Warren Buffett likes so much.
On balance, I’d definitely consider buying Bunzl for long-term passive income.
