- Shares in Bunzl hit four-year low after profit warning
- Support services giant now sees slower sales growth and profit margin drop
- Company is the first FTSE 100 firm to halt a share buyback scheme since 2020
- March’s full-year results had already hinted at slowdown in core business in USA
“A profit warning and termination of a share buyback programme, the first such halt by any FTSE 100 firm since the dark days of Covid-19 and lockdowns, are both taking a heavy toll on shares in Bunzl and driving them to a four-year low,” says AJ Bell investment director Russ Mould.
“March’s full-year results had already got a cool reception owing to worries about a slowdown in the core US operations and a reliance on acquisitions for growth, and those issues have now come home to roost. The company has flagged slower-than-expected sales growth in the US and the UK and Ireland as well as the impact of these trends upon profit margins in 2025.
“Sales in the first quarter rose just 0.8% on a stated basis. Revenues advanced by 2.6% once currency movements are excluded but acquisitions added 5.7% to that figure, so the top line shrank on a strictly like-for-like, or underlying, basis.
Source: Company accounts
“That is not in keeping with chief executive officer Frank van Zanten’s statement alongside March’s results for last year that Bunzl would generate ‘robust’ sales growth in the year ahead. Sales excluding acquisitions and currency movements are now expected to come in broadly flat in 2025.
“The weak start to the year is also forcing the company to recant on its expectation that underlying operating margin would come in flat against 2024’s multi-year high of 8.3%. Management now expects a dip beneath 8.0%.
“This suggests a downgrade to underlying profit forecasts for the year of some 5% to around £965 million, a fraction below the £976 million earned in 2024.
Source: Company accounts, Marketscreener, management guidance alongside Q1 2025 trading statement
“The specialist distributor had already flagged the combination of higher input costs and price pressure in the US business in particular, where sales and profit fell on a stated basis in 2024. These challenges have become even more acute, especially for the food service and grocery segment. Volumes have stayed soft, prices have weakened, a customer has been lost and Bunzl has invested in its sales proposition to reaffirm its competitive position in the market.
“That is all putting a lid on profit margins after a period of strong expansion and also eroding one of the key parts of the investment case for Bunzl’s shares, namely the essential nature of the services it provides for its customers, and the pricing power this brings. That pricing power has underpinned Bunzl’s remarkably consistent profit margins and the cash flow that funds dividends and buybacks and helped investors justify a premium rating for the shares.
“Before the trading alert and Wednesday’s collapse, Bunzl’s shares were trading on around 18.5 times forecast earnings for 2025, compared to 12.5 times for the wider FTSE 100. Such a premium is much harder to justify if underlying sales growth is weak, margins are under pressure and acquisitions are providing the top-line growth on offer – organic growth is harder to achieve and therefore more highly prized by investors.
“Acquisitions are expected to provide the bulk of revenue growth and support for margins as Bunzl derives operational synergies from its purchases. The firm spent £388 million on 19 acquisitions in 2023 after £194 million on 12 deals in 2022 and stepped up the pace again in 2024.
Source: Company accounts
“Bunzl spent £636 million on acquisitions last year, on a net basis, and management has committed to £700 million more in each of the next three years.
“Thankfully, Bunzl’s history suggests the purchases will be relatively modest in size – it struck 13 deals in 2024 – and designed to supplement momentum within the business, not conjure up growth from nowhere via some sort of blockbuster transaction where the integration risk is higher.
“But this is still lower-quality growth than genuine, organic progress and all of this thought process helps to explain why the shares are down by almost a quarter when the profit forecasts are likely to move down by around 5%.
“Price times earnings gives the share price, and assuming that 5% downgrade Bunzl now trades on 15 times forecast earnings for 2025. The derating and the earnings cut provide a double whammy as both the applied multiple and the profit forecasts go down, to prove the old adage there are few worse investments than a perceived source of reliable growth that then fails to deliver.
“The profit disappointment is then compounded by the termination of this year’s £200 million share buyback. Bunzl has called a halt to the programme at £115 million and become the first FTSE 100 firm to put a stop to a share buyback since 2020.
Source: Company accounts, Marketscreener, management guidance for 2025
“Whether this is a warning that the buyback boom is about to come to an end remains to be seen, but it will certainly have investors in the UK equity market on alert, given the economic uncertainty that prevails in the face of President Trump’s trade and tariff policies.
“Buybacks have been part of the investment case for the FTSE 100, and a contributor to its move to fresh all-time highs as recently as February, so any retrenchment here would be a potential blow. For the moment, the members of the UK’s benchmark index are in with a chance of setting a new all-time high for buybacks in 2025 after the announcement of £30.7 billion of such cash returns in the first four months of this year. The all-time high of £58.2 billion was set in 2022.”
Source: Company accounts. *2025 to date
