Is Bunzl the Ultimate Retirement Share?

LONDON -- The last five years have been tough for those in retirement. Portfolio valuations have been hammered and annuity rates have plunged. There's no sign of things improving anytime soon, either, as the eurozone and the U.K. economy look set to muddle through at best for some years to come.

A great way of protecting yourself from the downturn, however, is by building your retirement fund with shares of large, well-run companies that should grow their earnings steadily over the coming decades. Over time, such investments ought to result in rising dividends and inflation-beating capital growth.

In this series, I'm tracking down the U.K. large-caps that have the potential to beat the FTSE 100 over the long term and support a lower-risk income-generating retirement fund (you can see the companies I've covered so far on this page).

Today, I'm going to take a look at Bunzl  (LSE: BNZL  ) (NASDAQOTH: BZLFY  ) , the outsourcing and distribution company that supplies non-food consumables -- essentials like cleaning supplies -- to thousands of businesses around the world.

Bunzl vs. FTSE 100
Let's start with a look at how Bunzl has performed against the FTSE 100 over the last 10 years:

Total Returns 2008 2009 2010 2011 2012 10 yr trailing avg
Bunzl -14.1% 17.9% 9.8% 26.3% 17.2% 14.4%
FTSE 100 -28.3% 27.3% 12.6% -2.2% 10% 10.5%

Source: Morningstar. Total return includes both changes to the share price and reinvested dividends. These two ingredients combined are what make it possible for equity portfolios to regularly outperform cash and bonds over the long term.

Bunzl's 10-year average trailing total return is nearly 50% higher than the FTSE 100 average, and suggests that the company has delivered steady outperformance over the last decade.

What's the score?
To help me pinpoint suitable investments, I like to score companies on key financial metrics that highlight the characteristics I look for in a retirement share. Let's see how Bunzl shapes up:

Item Value
Year founded 1854
Market cap £4.3bn
Net debt £748m
Dividend Yield 2.2%
5 year average financials
Operating margin 5.5%
Interest cover 7.9x
EPS growth 8.5%
Dividend growth 8.6%
Dividend cover 2.3%

Here's how I've scored Bunzl on each of these criteria:

Criteria Comment Score
Longevity 150 years, including 56 years on the London Stock Exchange. 4/5
Performance vs. FTSE Above average, but sustainable. 4/5
Financial strength Strong cash generation and stable margins. 4/5
EPS growth Attractive earnings growth. 4/5
Dividend growth Very stable and reliable dividend growth. 5/5
Total: 21/25

Bunzl has its origins in a haberdashery business founded by Moritz Bunzl in Slovakia, back in 1854. Since then, it has evolved into a global company that keeps businesses supplied with all the non-food consumable products they need to service their operations, but do not sell or produce themselves. Typical examples are cleaning and washroom supplies, but Bunzl's business is far more diverse than this and has grown steadily through both organic growth and acquisitions.

Although Bunzl isn't cheap -- it currently trades on a price to earnings ratio (P/E) of 21.9 and has a dividend yield of just 2.2% -- it does have an excellent record of dividend growth that has seen the company's dividend rise every year since at least 1993, the earliest for which I could find records. Bunzl's dividend is usually well covered by free cash flow, making it extremely safe, and its growth record goes some way to balance the firm's low dividend yield and high P/E.

In my opinion, Bunzl could be an ideal share to drip feed money into, so that over time, you can benefit from its rising dividend payout and any dips in its share price.

My verdict
Bunzl's score of 21/25 is well deserved and highlights its strengths as a retirement share. It has a long record of stable, sustainable growth and rising dividends -- exactly the qualities needed for a retirement portfolio. However, if Bunzl's high price and low yield deters you, then you may want to take a closer look at the share I mention below, which has a proven record of providing a high dividend yield for its shareholders.

2013's top income stock?
The utility sector is known for its reliable, above-average dividends, but the Motley Fool's team of analysts has identified one FTSE 100 utility share that they believe offers a particularly high-quality income opportunity.

The company in question offers a 5.7% dividend yield and the Fool's analysts believe that it could be worth up to 850p per share -- offering new investors a potential 20% gain on the current share price of around 700p.

Indeed, the Motley Fool's analysts are so confident in this share that they've named their report"The Motley Fool's Top Income Stock For 2013"! This exclusive new report is completely free, but will only be available for a limited time -- so click here to download your copy now.

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