Why I would sell pricey Bunzl to buy bargain bank Barclays

Support services big beast Bunzl(LSE: BNZL) is a FTSE 100 dividend and growth stalwart that has lost its way lately. The stock slumped late last year, as investors fretted over narrowing core margins and declining returns, and the growing environmental war on non-recyclable single-use products. Amazon Business is perhaps the biggest concern, as it is directly threatening Bunzl's territory.

Bunzl of fun

In December I suggested buying the out-of-favour stock. It traded at 2046p at the time and although it had further to fall, it has since recovered to trade at 2226p, up 8.8% since then.

Bunzl would have done even better but the £7.5bn international distribution and outsourcing group has been hit by today's disappointing trading statement for the six months to 30 June, which has knocked 2.88% off its share price. This is despite reporting an 11% rise group revenue for the half year at constant exchange rates, with underlying growth of approximately 5%.

New normal

Bunzl is an acquisition hungry beast with operations across the Americas, Europe and Australasia, although lately its appetite has weakened. The last six months offered thin gruel by its ravenous standards, although further transactions are expected this year. Underlying revenue growth has also "returned to more normal levels" as its lower margin grocery business win in North America in 2016 has been fully absorbed.

Bunzl has routinely traded at more than 20 times earnings so today's P/E of just 18.4 is relatively low, but may also reflect the Amazon Business challenge. Its forecast dividend of 2.2% disappoints but cover of 2.5 suggests there is scope for progression. Earnings per share (EPS) forecasts look solid at 4% this year and next but Bunzl looks a little pricey, given current uncertainties.

Banking beast

Barclays(LSE: BARC) looks a much better value proposition as measured by its PE, trading at a forecast valuation of just 9.8 times earnings. Its dividend looks more compelling too, with a forecast yield of 3%, covered 3.5 times. The income is forecast to hit 4.2% in 2019, and kick on from there. The dividend was cut from 6.5p per share to 3p in 2016, but the outlook seems solid.

Forecast EPS growth for the full 2018 calendar year is nothing short of blistering, at 468%. Then we can look forward to 14% in 2019. However, as a big beast in the wild and woolly world of banking, there are threats as well. For example, in Q1 Barclays incurred another £2bn of charges for misdemeanours, including settling with the US authorities over alleged mis-selling of residential mortgage-backed securities and a further provision for PPI mis-selling.

Barclays bites

Barclays suffered an 8% drop in first quarter revenues to £5.36bn and a £236m loss before tax, compared to a £1.68bn profit one year earlier. UK revenues took a hit, although profits have been rising at its corporate and investment banking business.

The slow, stumbling recovery should continue, as Barclays focuses on boosting its financial strength and the efficiency of its business model. There will be further shocks and scandals, but given today's price and dividend projections, I feel it has more to offer than Bunzl.

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harveyj has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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