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With just 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 recently something popped up on my radar as an opportunity for the New Year.
Last week, FTSE 100 distributor Bunzl (LSE:BNZL) saw its share price fall 7% in one day. The catalyst was the last trading update, but this could be my chance to buy a stock I've been eyeing for a while.
What is the news?
Bunzl's latest report was a bit of a mixed bag. Revenue for 2024 is expected to be slightly lower than the previous year, and lower prices will weigh on results.
This is the bad news, but there are positive elements beneath the surface. Despite (or perhaps because of) lower prices, volumes remained strong and the effect of acquisitions helped boost sales.
The outlook, however, was much more positive. Bunzl expects more substantial revenue growth in 2025, driven by both acquisitions and organic sales increases.
In addition to this, the company expects resilient margins. These are higher than before the pandemic and the expectation is that they will remain this way until 2025.
my investment thesis
I'm looking to buy shares below £33 (it's slightly above at the moment). At that level, the company's market capitalization is just under £11bn and I can see a path to decent profitability at that valuation.
Over the next year, the company will return around £200 million of its market capitalization to investors, plus a dividend yielding 70 pence per share. To begin with, this is a return of around 4%.
In addition to this, the company intends to invest £700 million in acquisitions. If this results in 3% annual growth, there is a chance for a 7% return which I hope to increase over time.
Bunzl's share price fell to around £31 earlier this year, but I wasn't decisive enough to act. If the opportunity presents itself again in 2025, I am determined not to miss it.
Risks
The risk for Bunzl is that acquisition opportunities will not present themselves or will present themselves at too high prices. This would be a problem for the company's growth prospects.
The company believes it has a durable pipeline of opportunities, but even the best investors make mistakes in this regard. Therefore, the risk cannot be ignored.
One thing to note about Bunzl, however, 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 are not there, a capital return of £700m would not be the worst outcome. At the prices I'm targeting, that would be a 6.3% annual yield along with the 2.2% dividend.
Buying the dip
The time to buy shares of quality companies is when they suffer temporary recessions. And I think this is what is happening with Bunzl right now.
I can understand why investors might think that buying a stock with a price-to-earnings (P/E) ratio of 22 when earnings are falling is a bad idea. But deep down, I think that if I don't buy, I will miss an opportunity.
