Building wealth through the stock market is simple but not easy. It involves investing in companies that can achieve the kind of earnings growth that will make their shares worth more over time.
If I invest £1,000 per month at a 6.5% average annual return, I’ll have a portfolio worth £1,000,000 after 30 years. The question is, which stock should I buy in March to aim for this target?
What is Bunzl?
I like the look of FTSE 100 conglomerate Bunzl (LSE:BNZL). The company is a distributor that supplies products like disposable cutlery, food packaging, and hygiene products.
The firm’s big advantage is its scale. Its size and reach allows it to provide a fast and reliable service, which is something that its customers value.
As a growth company, Bunzl aims to increase its earnings over time and it has two ways of doing this. One is by acquiring other businesses and the other is by getting more from the ones it owns.
Over the last decade or so, the firm has done a decent job of this. Operating income has increased by over 10% per year and earnings per share are up by an average of 9.4% annually.
Still going strong?
The market didn’t respond particularly well to the company’s earnings report last month. In my view, though, the results looked pretty reasonable.
Bunzl reported a revenue decline of 1.9%, which might seem like a concern for a business focused on growth. But that’s not factoring in the effects of the sale of its UK healthcare arm in December 2022.
Accounting for that, revenues were largely flat year over year. Despite this, record margins caused operating income to come in 6.6% higher than the previous year.
This was accompanied by a 9% dividend increase for shareholders. At today’s prices, that means a yield of 2.18%.
Risks and rewards
At a price-to-earnings (P/E) ratio of around 20, investors clearly expect future growth from Bunzl. The biggest risk, in my view, is the chance of earnings not increasing fast enough to justify the price.
The most likely way this happens, in my view, is through a bad acquisition. If the firm overpays for a subsidiary – especially using debt – then the deal might destroy value, rather than creating it.
This is possible even for the best investors. In the past, Warren Buffett has made mistakes by paying too much to acquire a business at Berkshire Hathaway.
A strong acquisition pipeline should help offset this risk, though. And a market cap of £10.5bn means the firm shouldn’t be short of targets to acquire, reducing the need for it to overpay.
Aiming for £1,000,000
Building wealth in the stock market is simple but not easy – it involves buying stocks that will be worth more in future. And that means shares in companies that can grow their earnings over time.
In my view, Bunzl clearly fits the bill. The company is a steady, reliable operation that I think has good prospects to continue on the path it has been on for some time.
At today’s prices, £1,000 buys 319 shares in Bunzl. Looking across the FTSE 100, I can’t see a growth stock that looks more attractive to me right now.
This post was originally published on Motley Fool
