With only a few days to go, I won’t have the cash to buy anything in my Stocks and Shares ISA before the end of the year. But something has come onto my radar recently as an opportunity for the New Year.
Last week, FTSE 100 distributor Bunzl (LSE:BNZL) saw its share price drop 7% in a day. The catalyst was the latest trading update, but this could be my chance to buy a stock I’ve been watching for a while.
What’s the news?
Bunzl’s latest report was a bit of a mixed bag. Revenues for 2024 are expected to be slightly lower than the previous year, with lower prices weighing on results.
This is the bad news, but there are positive elements beneath the surface. Despite (or maybe due to) lower prices, volumes remained strong and the effect of acquisitions helped boost sales.
The outlook, however, was much more positive. Bunzl is expecting more substantial revenue growth in 2025, driven by both acquisitions and organic sales increases.
On top of this, the company is forecasting resilient margins. These are higher than they were before the pandemic and the expectation is that they’ll stay this way going into 2025.
My investment thesis
I’m looking to buy the stock anywhere below £33 (it’s slightly above that at the moment). At that level, the company’s market cap is just below £11bn and I can see a path to a decent return at that valuation.
Over the next year, the firm is set to return around £200m of its market cap to investors, in addition to a dividend with a yield of 70p per share. That’s a return of around 4% to start with.
On top of this, the company is looking to deploy £700m into acquisitions. If this results in 3% annual growth, there’s an opportunity for a 7% return that I expect to increase over time.
The Bunzl share price fell to around £31 earlier this year, but I wasn’t decisive enough to act. Given the opportunity again in 2025, I’m determined not to miss out.
Risks
The risk with Bunzl is that acquisition opportunities either don’t present themselves, or come at prices that are too high. That would be a problem for the company’s growth prospects.
The firm thinks it has a durable pipeline of opportunities, but even the best investors make mistakes in this regard. So the risk can’t be overlooked.
One thing to note about Bunzl though, is that it has stated its intention to return cash to shareholders if it can’t find companies to buy. And I think that’s the right approach to take.
If the opportunities aren’t there, a £700m return of capital wouldn’t be the worst outcome. At the prices I’m targeting, it would be an annual return of 6.3% to go with the 2.2% dividend.
Buying the dip
The time to buy shares in quality businesses is when they hit temporary downturns. And I think this is what’s going on with Bunzl at the moment.
I can see why investors might think buying a stock at a price-to-earnings (P/E) ratio of 22 when revenues are falling is a bad idea. But beneath the surface, I think if I don’t buy I’d miss an opportunity.
This post was originally published on Motley Fool
