Why I think Bunzl and the Diageo share price can thrash the FTSE 100 again next year

Businessman leading a chart upwards

Distribution and outsourcing group Bunzl(LSE: BNZL) has been one of the strongest performers on the FTSE 100 for years, a stock I have regularly hailed as an unsung hero.

Bunzl in the oven

Investors will be singing its praises today as it has shown defensive teeth in a volatile 12 months. The £8.18bn FTSE 100 stock is actually up 16% over the past year, against a drop of nearly 10% across the index as a whole, and 77% over five years, against just 6%. That’s what I call outperformance.

Acquisition-hungry Bunzl has been buying up smaller operators across the Americas, Europe and Australasia, although it was knocked earlier this year by the war on non-recyclable, single-use products, the threat posed by Amazon Business, and a slide in core margins.

Danish tasty

Bunzl published a trading statement this morning confirming more positive expectations set out in October, saying it expects group revenue for the year to increase 8-9% at constant exchange rates, with organic growth of more than 4%, and a similar impact from acquisitions, net of disposals. Currency movements are expected to reduce constant exchange revenue growth by 3-4%.

It also announced another acquisition, Danish-based foodservice distributor CM Supply, which supplies own-brand and customised foodservice disposables and packaging to the hotel, restaurant and catering sector. Its proposed acquisition of Volk do Brasil now has regulatory clearance and should complete in January.

Go to it

My colleague Royston Wild recently said he would buy and hold Bunzl for a decade, calling it a go-to stock for investors seeking solid earnings growth year after year. It has certainly delivered that, and things look promising with forecast earnings per share (EPS) growth of 5% this calendar year, and 4% next.

Bunzl isn’t cheap, trading at 18.2 times earnings, but you pay a premium price for quality. And while the forecast yield is at the low end, 2.1%, management has been progressive, and cover is 2.5. A buy, for showing its qualities during bad times, as well as good.

Drink up!

FTSE 100-listed spirits giant Diageo(LSE: DGE) is another classy performer, up 7.5% over the past turbulent year, and by 52% over five years. As Roland Head points out, long-term investors admire the brand for its high profit margins, valuable brands, and continued growth.

The group, whose roster of familiar brands include Smirnoff, Gordon’s and Johnnie Walker, recently sold 19 brands, including Seagrams VO, to US firm Sazerac for £340m and plans to reward loyal shareholders by using the cash to repurchase its own stock.

Premium brand

Diageo typically trades at a premium price, and that remains the case today. It’s valued at 23.6 times earnings, which would put me off a lesser company, but this stock nearly always trades in the low 20s. If you spot it below 20 at any point, my advice would be to buy. It has defensive qualities, as we have seen in recent troubled weeks.

The yield is relatively low at 2.3%, with cover of 1.8. But once again, that’s standard for Diageo. Forecast EPS growth of 5% over the next year confirms the buy case for me.

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harveyj has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo. 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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