Half-year results from Bunzl (LSE: BNZL) today are predictably good in an outcome that we’ve become used to over recent years. Revenue at constant currency rates is up 7% compared to a year ago and adjusted earnings per share rose 7% too.
Boring but steady
You won’t get over-excited by the firm’s business. The FTSE 100 distribution and outsourcing service company supplies a range of non-food products to several market sectors – stuff that keeps businesses and organisations in multiple sectors ticking over with an easy supply of essentials, such as food packaging, grocery, films, labels, gloves, bandages, safety consumables, and products for cleaning and hygiene.
Dull, dull, dull, but boring and steady is good, because the shares are around 370% higher than they were eight years ago, and the dividend has inflated by more than 60% over the past five years. The directors celebrated the current period of success by slapping another 8% on the interim dividend, which continues an impressive 24-year record of dividend growth.
Around 3.7% of the advance in revenue during the period came from organic growth but the company also announced 11 acquisitions in the first half of the year, which continues a long-running acquisition programme that accelerated this year. Chief executive Frank van Zant is pleased about that, saying in the report that the acquisition activity “continues to be an important part of our growth strategy.”
Well-balanced growth
The firm’s expansion seems well-balanced with cash flow from operations sticking close to the levels of operating profit achieved over the past five years. That gives me confidence that dividend growth is well-supported. City analysts following the firm expect earnings to put on 6% this year and 6% during 2018, which means forward earnings cover the anticipated dividend payout for 2018 a solid-looking two-and-a-half times.
Bunzl earns around 52% of operating profit from North America, 26% from continental Europe, 13% from the UK and Ireland and 9% from the rest of the world, making the US its most important market. So, if you are nervous that the Brexit process might affect companies relying on the UK for their business, a firm like Bunzl could be for you. The one slight negative is that the company’s attractions have pushed up the valuation. At today’s share price of 2,311p, the forward price-to-earnings (P/E) ratio for 2018 runs at a little over 19.
Sector rotation?
Despite the high-looking rating, I think Bunzl leaves a better taste in the mouth than British American Tobacco (LSE: BATS) and its business has attractive defensive characteristics without needing to deal in tobacco. The breaking of the news this summer that the Food and Drug Administration (FDA) in the US plans to reduce nicotine in cigarettes to non-addictive levels seems to have kicked off the recent plunge in tobacco stocks. But I’ve wondered for a long time how far the rally could go and now fear that this could be the beginning of a rotation out of the sector, which seems long overdue.
Today’s 4,761p share price puts BATS on a forward P/E rating lower than Bunzl’s at just over 15, but I’m not tempted and would rather take my chances with Bunzl.