My Rolls-Royce (LSE: RR) shares have soared more than 80% since I bought them in October but now I’m looking for something with steadier growth prospects.
While I think the FTSE 100 large aircraft-engine maker has a lot more growth in it, I suspect the share price may have flown a little too high for its own good.
Investors have been buying the future of the company as they hope for better days following the appointment of tough talking new CEO Tufan Erginbilgic. Yet it’ll take a lot of hard work to deliver that growth.
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Holding not buying
Rolls-Royce will enjoy an automatic double boost from the return of air travel and rising demand for its military engines due to the global arms race, but ventures such as its modular nuclear reactors will demand time and money.
Management has to fund its growth plans while simultaneously paying down its £3.3bn debt and battling a legal complaint by Indian authorities over the procurement and manufacturing of 123 Hawk 115 advanced jet trainers.
I think the share price might idle for a while until Erginbilgic delivers tangible benefits, so I’m looking elsewhere for my next FTSE 100 growth stock.
Outsourcing specialist Bunzl (LSE: BNZL) lacks the name recognition of Rolls-Royce, but deserves more credit for its solid, long-term performance.
The Rolls-Royce share price may have skyrocketed 62.46% over the last year, but it’s still down 47.89% over five years. By comparison, Bunzl is up a decent 15.54% over 12 months and an equally decent 34.3% over five years.
Bunzl’s 10-year performance chart mostly shows smooth upwards progression, in marked contrast to the bumpy downward slide of Rolls-Royce. Yet the company, which sells non-branded products such as disposable paper and plastic packaging to business, has grown via an aggressive acquisition strategy, buying up 200 businesses in less than 20 years.
Better still, it hasn’t suffered any of the nonsense Rolls-Royce has put its shareholders through, such as bribery scandals and profit warnings. Over the last five years, revenues have climbed from just over £9bn to just over £12bn, while pre-tax profits have also increased every year, from £424.8m to £634.6m.
I’ve admired it for ages
In fact, the only bumpy thing about Bunzl is its dividend per share, which has ricocheted around from 50.2p in 2018 to 89.9p in 2020 then down to 62.7p in 2022. The current forecast yield is a modest 2.2%, but covered 2.6 times by earnings.
The stock currently trades at 16.92 times earnings, well above the FTSE 100 average of 9.9 times. But the premium is justified, I believe.
As with every stock, there are risks. Inflation has driven up raw materials costs and if the world does slip into recession that could hit sales. Being fully valued gives a smaller margin for failure. And acquisitions can be risky, although Bunzl has plenty of experience in making them work for the greater good.
I took a chance when buying Rolls-Royce shares, and it paid off. Bunzl feels less of a risk, and with luck should deliver a stress-free stream of dividends and share price growth for decades. I’ll buy it over the summer, taking advantage of any market dip.
