UK Edition
The highest rate of inflation for 30 years does not spell disaster for all companies. Those able to pass rising costs on to their customers could generate impressive earnings growth during periods of high inflation.
One such company is FTSE 100 member Bunzl. It provides a wide range of goods that are not for resale, such as packaging, hygiene equipment and personal protection items, to sectors including grocery, healthcare and retail across 31 different countries.
Encouragingly, its latest annual results stated that inflation was strongly supportive to growth. It has been able to pass higher costs on to customers largely because its agreements with them have product price movements factored in.
This could become increasingly valuable because high inflation may prove to be long-lasting as employees’, consumers’ and businesses’ expectations of rapidly rising prices gradually become ingrained.
Bunzl has also sought to cut its own costs through operational efficiencies such as consolidating its warehouse space and increasing automation. This will further help to support margins in an era where many businesses are likely to experience stunted profit growth.
Of course, the company has a long record of generating strong and consistent bottom-line growth. Since 2004 its adjusted earnings per share have increased at a compound annual rate of more than 10pc. This has allowed it to deliver 29 consecutive years of dividend growth.
While its dividend yield of 1.9pc is 1.4 percentage points lower than that of the FTSE 100 index, the company’s capacity to deliver inflation-beating, reliable growth should allow it to offer long-term income investing appeal. Dividend cover of 2.3 times profits further enhances its income prospects.
The company’s strategy largely focuses on growth through acquisition. In the 2021 financial year it made 14 acquisitions at a total cost of £508m. Together, they added four percentage points to its annual sales growth.
Crucially, the company’s financial position has not been compromised by its ongoing activity in mergers and acquisitions. It has a net-debt-to-equity ratio of just 61pc, while net finance costs were covered more than 11 times by operating profits in its latest financial year.
In terms of its debt covenants, a net-debt-to-Ebitda (earnings before interest, tax, depreciation and amortisation) ratio of 1.6 is well within its 3.5 limit. A solid financial position suggests there is significant scope for further acquisitions through which to enhance revenues and profits over the long run.
Further details on its financial performance are due in a trading update on Wednesday.
Meanwhile, the performance of its underlying business could be enhanced by continued investment in digital opportunities. The proportion of the company’s customers ordering products online increased by eight percentage points to 67pc between 2018 and 2021.
Digital sales reduce its costs and provide a faster ordering system for customers that should further differentiate its offering.
Clearly, sales of the company’s personal protective equipment are declining as Covid becomes endemic. However, its wide range of operations and geographic diversity mean that it is likely to overcome short-term changes in demand across its breadth of products.
Over recent months, the company’s shares have benefited from its international exposure. Dollar strength, coupled with the fact that 60pc of Bunzl’s revenue is generated in North America, has boosted its share price. It is now 46pc higher than at the time of our original tip in May 2019.
Although a forecast price-to-earnings ratio of 19 is by no means cheap, the company’s risk/reward opportunity remains highly favourable. Its solid financial position provides scope for more acquisitions, while its capacity to pass higher costs on to customers in an era of rampant inflation means it deserves a premium valuation.
Questor says: buy
Ticker: BNZL
Share price at close: £30.65
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