It could arguably have been a lot worse. Coronavirus brought Bunzl’s enviable track record of paying a higher dividend in every period for the past 27 years to a shuddering halt yesterday.
The FTSE 100 provider of essential day-to-day supplies to businesses worldwide cancelled a final dividend payment of 35.8p a share that it had already declared at its annual results in mid-February before the full effects of Covid-19 had become clear.
The move provides the group with £119 million of cash as a buffer should it need it in the months ahead, although it said it was considering whether it might be able to bolster this year’s interim payout to make up for some of the lost shareholder income. It has until August to make the decision.
Given that supplying the hospitality, leisure and general retailing sectors accounts for about 35 per cent of Bunzl’s revenues it wouldn’t have come as a surprise if the group had also warned on profits. It didn’t. In fact, Bunzl said that higher demand in other areas — such as healthcare and hygiene — had actually led to a far better than expected overall trading performance between the beginning of January and March 28. Whether it lasts is another matter.
Bunzl began as a haberdashery in Bratislava in 1854 and prides itself on distributing humdrum but essential business supplies. It provides napkins, plastic cutlery and toilet rolls for restaurants and canteens but it also supplies bandages and surgical gloves for hospitals and care homes.
Even before the virus, life had been difficult for the group, which has been battling against a slowdown in underlying revenue growth in its main markets, particularly in North America, for the past year.
Having reported growth in group revenues of just 1 per cent last year stripping out the effect of currency movements, the picture as painted yesterday by Bunzl was altogether different. Taking account of currency movements and adjusting for fewer trading days in the reported quarter, revenue grew by 6 per cent, very high for a business whose earnings tend to be linked to GDP in the countries where it operates.
Falls in revenues from supplying hotels and restaurants and non-essential retailers were more than offset by increased demand for cleaning, safety and hygiene equipment, including for example from delivery drivers wearing surgical gloves to make their drop-offs and grocers and supermarkets ordering extra sanitisers for staff.
It almost certainly won’t last. The figures will not have captured the full effect of tighter restrictions on movement introduced very recently.
Reading between the lines of Bunzl’s trading update yesterday, it seems reasonable to assume that trading will worsen before it returns to anything resembling normality. The company has suspended its guidance for its performance over the full year, as well as putting all merger and acquisition deals on hold. The measures the company is taking, which include furloughing some staff in the UK, look sensible. Its scale and the wide variety of business areas it is exposed to should help it remain resilient. In the meantime, it is not overborrowed, with leverage at 1.9 times pre-adjusted profits before tax, and it has plenty of room to draw on its £600 million credit facility.
Having come off heavily early last month, Bunzl’s shares have recovered some of their value; they were down 60p or 3.8 per cent at £15.05 yesterday as disappointment over the dividend balanced stronger sales.
At about 12 times forecast earnings and carrying a historical yield of 3.3 per cent, the shares look reasonably valued given the dangers ahead. Owners should hang on.
ADVICE Hold
WHY Diverse global business with low gearing and shares are not expensive, but trading will deteriorate before it improves
Safestore
Not every listed company is canning its dividend. Among those to confirm plans to press ahead with a payout is Safestore, whose shareholders will receive a 12p final award next week at a cost to the storage group of about £25.25 million.
That may be small relative to the company’s stock market value of nearly £1.3 billion but it is bound to go down well with shareholders
Safestore was founded in 1998 as the owner of three freehold properties in London. It has grown to become the UK’s biggest self-storage provider by lettable space, with 6.47 million sq ft, excluding several warehouses in development. It also has facilities in France, Spain and the Netherlands.
Needing a place to store things is not just an issue for consumers who are living in small homes or moving. Like its rivals, Safestore’s units have become increasingly popular among sole traders and small businesses to keep materials and equipment.
Self-storage units have been designated an essential part of the supply chain and have remained open. Although already largely automated, Safestore has taken additional measures to protect staff and ensure that customers can keep a safe distance apart. It has reduced staffing levels but promised to pay all wages. It can still take on new customers, who can have their ID checks run electronically.
In its market update yesterday, Safestore said that the effect of the coronavirus on trading had so far been fairly minimal, with its occupied space falling by just 0.8 per cent to 4.92 million sq ft since the end of January.
That could be the effect of either small businesses or individuals decamping but, unlike Big Yellow last week, it did not say that it had noticed a large influx of students urgently needing storage space.
Safestore and its sector remain highly attractive over the longer term, although in the short term trading is likely to come under pressure, particularly as the housing market begins to seize up.
The shares, up 32p or 5.3 per cent to 637p, trade for 20.8 times Stifel’s forecast earnings for a dividend yield of about 3.1 per cent. That feels about right in the current climate.
ADVICE Hold
WHY Strong performance in face of Covid-19 is in the price