- Bunzl picks up pace of acquisitions as underlying growth slows
- Specialist distributor faces price pressure and rising input costs
- Profit margins still increased in 2024, and no decline expected in 2025
- Company continues to increase cash returns via dividends and share buybacks
“A lack of upside surprises in the guidance for 2025’s profits is weighing on shares in Bunzl, even if the FTSE 100 index member is increasing its dividend once more and has plans to further boost cash returns for shareholders in the coming year,” says AJ Bell investment director Russ Mould.
“Investors may also be looking at the decline in profits on a stated basis in 2024 and how the company’s increased focus on acquisitions may also hint at a slowdown in the core operations, although Bunzl has a good track record of using bolt-on deals to great effect while avoiding the risk of a big, so-called ‘transformational’ purchase.
“Bunzl’s results statement champions a 7% increase in 2024’s headline operating profit once currency movements are taken out of the equation. However, investors seem to be focusing on the 1% rate of advance in operating income as reported under statutory accounting rules, especially as revenues failed to advance for the second year in a row.
Source: Company accounts
“This is not to accuse Bunzl of any accounting tricks or sleight-of-hand. The drop in stated pre-tax profits reflects business disposals, and adverse currency movements, notably from hyperinflation in Argentina, as well as higher interest charges in borrowing and increased lease costs.
“Instead, investors will be looking at the US business in particular, where sales and profit fell on a stated basis, thanks to price deflation and reduced volumes at the US foodservice distribution business.
“One of the key parts of the investment case for Bunzl has been the essential nature of the services it provides for its customers, and the pricing power this brings. That pricing power underpins Bunzl’s remarkably consistent profit margins and the cash flow that funds dividends and buybacks. It also explains why the shares trade on a healthy premium to the wider FTSE 100, on around 18 times earnings for 2024, compared to the 14 times for the broader index overall.
“Bunzl supplies the things that other firms need in order to do business; but not items they would sell to their customers. It supplies disposable coffee cups to cafes, food wrap to supermarkets, hard hats to builders, cleaning materials and bandages and rubber gloves to hospitals.
“The combination of softer prices and higher input costs is a challenge that investors are accustomed to Bunzl overcoming, so they will at least take some reassurance from the guidance for 2025’s sales and profits from chief executive Frank van Zanten.
“The company is targeting ‘robust’ sales growth, and an unchanged adjusted operating margin. Analysts are pencilling in a 4% increase in both figures for the coming year.
Source: Company accounts, Marketscreener, consensus analysts' forecasts
“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 thirteen deals in 2024 – all designed to supplement momentum within the business, rather than conjure up growth from nowhere via some sort of blockbuster transaction where the integration risk is higher.
“If Bunzl cannot find the deals it wants at the price it wants, then the company will instead return any excess cash to investors. The company has supplemented last year’s £250 million share buyback programme with a new, £200 million scheme in 2025.
Source: Company accounts, Marketscreener, management guidance for 2025
“An 8% increase in the dividend for 2024 would have taken Bunzl’s annual dividend growth streak to thirty-two years, had Covid-19 not got in the way. This impressive track record is likely to be maintained in 2025, too, given the expected growth in earnings and how earnings cover for the dividend is a comfortable 2.0 times.
Source: Company accounts, Marketscreener, consensus analysts' forecasts
