ii view: Bunzl boosted by cost savings

The dividend is up and debt is down. Should investors start buying Bunzl?

Full-year results to 31 December 2019

• Revenue up 1% to £9.33 billion
• Adjusted profit before tax up 2.4% to £579 million
• Operating margin up from 6.7% to 6.8% on a currency adjusted basis
• Net debt down 10% to £1.25 billion
• Dividend for the year payment up 2.2% to 51.3p per share

Chief executive Frank van Zanten said:

"Against the background of mixed macroeconomic and market conditions which prevailed during 2019 across the countries and sectors in which we operate, I am pleased to report that Bunzl has produced another resilient performance with an increase in operating margin.  It is particularly good to see continued strong cash conversion and free cash flow growth.

Looking forward, although we continue to see challenging trading conditions in many of our markets, our strong competitive position, diversified and resilient businesses and ability to consolidate our fragmented markets further should lead to improved growth at constant exchange rates principally due to the impact of the good level of recent acquisition activity.  Bunzl has a strong balance sheet with significant financial capacity and acquisitions remain a key element of our strategy.  The acquisition pipeline is promising and a number of discussions are ongoing."

ii round-up:

Distributor Bunzl (LSE:BNZL), whose products include cleaning items and personal protective equipment, reported profits which topped city estimates in these latest results. 

Cost savings for its largest North American division, accounting for nearly 60% of group sales, aided by a pickup in overall acquisitions, helped boost operating margin from 6.7% to 6.8%. 

Bunzl, whose customers include Walmart (NYSE:WMT), Domino's Pizza (LSE:DOM) and the National Health Service, continued its strategy to bolster growth via acquisitions, buying three businesses over the year for £124 million, adding £97 million of annualised revenue. It bought 157 companies between 2004 and 2018 at a total cost of £3.3 billion.

The share price rose by more than 2% in UK morning trading, partially counterbalancing a near-13% drop during 2019. 

Organic sales over the full year fell by 0.2%, largely hit by lower sales to a large US grocery customer – a marked contrast to a 4% plus gain over 2018. 

Accompanying management outlook comments pointed to no material impact on its supply chain to date as a result of the coronavirus, although noted that it was continuing to monitor the situation closely.

ii view:

Diversification in the products it distributes, business sectors it serves and geographical locations it operates across prove a core strength at Bunzl. In addition, a strategy to grow both organically and by focused acquisition has to date served shareholders well. However, slowing organic growth and reduced and reduced acquisition activity have begun to raise questions over prospects. 

For investors, a forward price/earnings (PE) ratio marginally below the 10-year average offers some encouragement. A 27-year track record of dividend growth is not to be overlooked either, although the dividend yield at around 2.6% is below the 4%-plus average for the FTSE 100 index. For now, and despite the tailwind of currency movements aiding profits, investors might want to take a 'wait and see' approach until the rate of growth for organic revenue improves.

Positives: 

• Diversified customer type and geographical location
• Bunzl boasts a 27-year track record of dividend growth 
• Brexit protection - over 85% of revenue is generated outside the UK 

Negatives:

• Underlying or organic revenue growth has slowed
• Spent £124 million on acquisitions compared to average annual spend £300 million since 2010
• A 2.2% dividend increase compares to 9% last year

The average rating of stock market analysts:

Hold