Head to Head: Rexam vs. Bunzl

LONDON -- In this series, some of your favourite FTSE 100 (UKX) shares go head to head in a three-round contest for superiority.

In Round 1, the firms fight on earnings; in Round 2, on dividends; and Round 3 is a battle of the balance sheets. The winner will be the company that has racked up most points at the end of the contest.

Stepping into the ring today are packaging companies Rexam (LSE: REX  ) and Bunzl (LSE: BNZL  ) .

Rexam is a packaging and can maker, serving the beverage, personal-care, and health-care markets. Bunzl is a little more diverse, but the supply of packaging is a major part of its two largest businesses, which serve the grocery and foodservice markets.

The shares of both companies have outperformed the FTSE 100 over the past year. The Footsie is up 6%, but Rexam is up 27% and Bunzl 24%.

Let's take our seats at ringside.

Round 1: earnings

 

Rexam

Bunzl

Recent share price

448 pence

1,029 pence

Last year's price-to-earnings (P/E)

12.4

15.0

Current year's forecasted P/E

12.8

14.6

Four-year earnings per share (EPS) compound annual growth rate (CAGR) (%)

10

11

Current year's forecasted EPS growth (%)

-3

3

Forecasted operating margin (%)

8.9

5.8

Source: Digital Look. Winners in bold.

Rexam wins the points for P/E, but Bunzl scores on earnings growth (narrowly in the case of the historic version). The first round is decided in Rexam's favor when it takes the final point for a superior operating margin.

Round 2: dividends

 

Rexam

Bunzl

Last year's dividend yield (%)

3.2

2.6

Current year's forecasted dividend yield (%)

3.4

2.7

Four-year dividend CAGR (%)

-5

9

Current year's forecasted dividend growth (%)

5

5

Forecasted dividend cover

2.3

2.6

Source: Digital Look. Winners in bold.

It's all square in the second round. Each company takes two points and they match each other on forecasted dividend growth.

Round 3: balance sheet

 

Rexam

Bunzl

Price-to-book (P/B) ratio

1.7

4.2

Net gearing (%)

61

83

Source: Digital Look. Winners in bold.

Rexam finishes strongly, taking both points in round three. At the end of the contest, Rexam has won two rounds and one round has finished in a draw. The overall points tally is Rexam 7.5 and Bunzl 4.5.

Post-match assessment
This was a comfortable win for Rexam. In the process, the company took all five of the valuation-ratio points I use in these head-to-head contests: historic and forecasted P/E, historic and forecasted dividend yield, and P/B.

Rexam's P/E, yield, and P/B look reasonable compared with the wider market rather than being at bargain levels. Looking beyond the forecasts for a modest drop in current-year EPS, analysts have penciled in a low double-digit EPS increase for 2013, giving a fair-value P/E-to-EPS growth ratio of 1.

If you're wondering about Rexam's negative historic dividend growth, it's down to a big dividend cut in 2009. The company had borrowed money to pay the previous year's dividend, but debt soon got out of hand: Not only was the dividend cut in 2009, but the company also asked shareholders to cough up 350 million pounds to further shore up the balance sheet. Rexam's chief executive stepped down, but the finance director kept his job.

One investor who immediately gave a scathing verdict on the dividend cut and capital raising -- by disposing of his Rexam shares -- was top City investor Neil Woodford. He has thrashed the market over the past 15 years by investing in blue-chip companies that deliver sustainable dividend growth.

If you're interested in blue-chip dividend powerhouses, you can help yourself to a free and exclusive Motley Fool report where you'll learn about Woodford's enormously successful strategy and eight of the companies he currently favors. This free report is available for a limited time only, but it can be in your inbox in seconds: simply click here.


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