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With only a few days left, I won’t have the money to buy anything in my Stocks and Shares ISA before the end of the year. But something came up on my radar recently as an opportunity for the New Year.
Last week, FTSE 100 distributor Bunzl (LSE:BNZL) is down 7% on the day. The catalyst was a recent trading update, but this could be my chance to buy a stock I’ve been eyeing.
What’s the news?
Bunzl’s latest report was a mixed bag. Revenues in 2024 are expected to be slightly lower than last year, with lower prices weighing on the results.
This is bad news, but there are positive aspects beneath the surface. Despite (or perhaps because of) lower prices, prices remained strong and the impact of acquisitions helped boost sales.
However, the view was even better. Bunzl expects significant revenue growth in 2025, driven by both acquisitions and increased organic sales.
On top of this, the company predicts strong margins. These are higher than they were before the pandemic and are expected to remain this way through 2025.
My investment thesis
I’m looking to buy the stock anywhere below £33 (it’s a bit above that at the moment). At that rate, the company’s market cap is just under £11bn and I can see a path to a decent return on that valuation.
Over the next year, the company will return around £200m of market capitalization to investors, in addition to a dividend yield of 70p per share. That’s almost a 4% return to start with.
On top of this, the company is looking to invest £700m in acquisitions. If this results in 3% annual growth, there is a potential 7% return that I expect to increase over time.
Bunzl’s share price fell to around £31 earlier this year, but I didn’t make up my mind enough to act. If I am given the chance again in 2025, I am determined not to miss it.
Accidents
The danger with Bunzl is that acquisition opportunities do not present themselves, even if they come at very high prices. That could be a problem for the company’s growth prospects.
The company thinks it has a solid pipeline of opportunities, but even the best investors make mistakes at this point. So the risk cannot be ignored.
Another thing to note about Bunzl is that it has stated its intention to return cash to shareholders if it cannot find companies to buy it. And I think that’s the right way to take it.
In the unlikely event that the £700m return would not be too bad an outcome. At my target rates, it would be a 6.3% annual return to match the 2.2% dividend.
Buying a dip
The time to buy stocks in quality businesses is when they hit a temporary downturn. And I think this is what is happening with Bunzl at the moment.
I can see why investors might think buying a stock with a price-to-earnings ratio (P/E) of 22 when earnings are falling is a bad idea. But bottom line, I think if I don’t buy I’m missing out on an opportunity.
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