They say there’s no escaping two things in life, death and taxes, and this certainty is part of the reason shares of funeral provider Dignity (LSE: DTY) have risen more than 140% over the past four years alone. But is this incredibly recession-resistant share worth buying for the more nervous investors among us?
Well the bad news is that while everybody is going to die eventually, Dignity can’t predict when we’ll kick the bucket. It turns out the annual death rate can fluctuate dramatically. In the first three quarters of 2016, total deaths were down more than 2.7% year-on-year, which was enough to send underlying operating profits down 2.9% in the same period.
Over the long term however, the trend looks quite appealing for Dignity as an ageing population increases total deaths even as medical advances extend life expectancies. And while Dignity can’t control the number of deaths in the UK it can, and has been, growing through acquisitions and organic expansion.
Through September 23 the group had acquired 11 funeral locations for £11.3m as well as opened nine new ones. There’s also still plenty of room to continue expanding as Dignity controls only around 12% of this highly fragmented market.
There are a few red flags though. The company may need to pump the brakes on large acquisitions for a while as net debt as of June was £490m, or roughly 3.9 times the total cash generated from operations in the whole of 2015. Likewise it may have to contend with an increasing consumer demand for lower cost funerals or natural burials.
This may not be a major problem until millennials have aged into Dignity’s core demographic but I’m also leery at the lofty 22 times forward earnings valuation assigned to the company’s shares. High debt, a high valuation and low dividends don’t make Dignity an appealing share for me, but more risk-averse investors may want to take a closer look at what is a very, very non-cyclical share.
Now for a less depressing option
More appealing to me is food producer Cranswick (LSE: CWK). The company may not be a household name but its meats are consumed in most homes as it supplies grocers such as Tesco and J Sainsbury with pork, sausage and other meats. The overall domestic market for protein products is rather stagnant but the premium segment Cranswick targets is growing at a solid 3% per annum.
The company is supplementing growth in the premium domestic market with a series of targeted acquisitions and overseas expansion. These efforts helped boost revenue a full 15.9% year-on-year in the first six months of 2016 to £580m. Adjusted pre-tax profits rose an even more impressive 23.9% in the period, which allowed net debt to fall to £2.9m and an increase to dividends of 12.9%.
Other investors are also bullish and Cranswick shares now trade at a relatively pricey 19 times forward earnings. That said, a healthy balance sheet providing plenty of firepower for further acquisitions, a management team with a long history of growing the business and improving margins plus a relatively stable non-cyclical business make Cranswick a share I’ll be following closely.
