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2 ‘disgusting’ shares I like

William Murphy. Licence: https://creativecommons.org/licenses/by-sa/2.0/

Some of my favourite companies are those whose services will always be in demand but which most people would rather not spend too much time thinking about: defensive shares with a twist, if you will. Examples of this include the UK’s only listed funeral services provider Dignity (LSE: DTY) and waste management firm, Biffa (LSE: BIFF).  

With the US election now looking too close to call and PM Teresa May gearing up to trigger Article 50 by the end of March, let’s look at why these two initially uninviting companies might be worthy additions to portfolios over the coming months and years. 

Dwell on Dignity

In his book One Up On Wall Street, investment legend Peter Lynch documented how he made a killing buying shares in US ‘deathcare’ firm, Service Corporation International. Shares went for 70 cents back in 1980. By 1998, they’d hit $40. Early investors in Sutton Coldfield-based Dignity haven’t done quite as well but the shares are still up over 1,000% since the company came to the market back in 2004.

There could be more to come. The beauty of a company like Dignity is that it operates in a very fragmented industry, ripe for consolidation. True, the rate of growth may be slower than the market’s favourite new tech share but this comes without the hype (and likely disappointment) of the latter.

Not only is Dignity a great growth play, its devotion to helping us with one of the two things we can be certain of in this world makes it about as defensive as they come. The nature of its work means that earnings are both predictable and likely to rise over time thanks to the increasing cost of funerals (estimated by insurer, SunLife, to have jumped by 103% since 2003 to £3,897). Moreover, funeral services are relatively price inelastic. Demand won’t fall if costs change. 

Any drawbacks? Well, despite the odd special payout over the years, dividends aren’t particularly impressive at this stage with a yield of just under 1% due for 2017. Then again, this is to be expected for a company still looking to dominate the market (its biggest rival is the Co-op). Those investing purely for income may want to look away. Those with sufficiently long horizons may wish to investigate further.

Rubbish share?

Regardless of what happens in the political and economic arenas over the next few months, someone will still be needed to pick up our rubbish afterwards. Enter new-kid-on-the-market Biffa, fresh from its IPO and currently trading at 174p.

Right now, it’s difficult to say how the shares will perform in the short term. The 104 year-old waste management company’s entry to the market was marred by its price being reduced to 180p rather than the 220p desired by management, suggesting investors are becoming wary of buying new issues that carry considerable debt (which Biffa does). The fact that Biffa also wants to use the cash raised to settle a payment over a dispute relating to landfill taxes isn’t the most encouraging of reasons for wanting to attract investors.

Nevertheless, along with Dignity, Biffa is about as defensive as they come. Although its balance sheet is a concern, I’m content to add it to my watchlist and see how the shares fare.  Market reaction to the company’s first set of interim results in late November will be telling. 

Any other options?

Of course, Dignity and Biffa aren't the only options out there if you're on the hunt for defensive shares.  

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Paul Summers owns shares in Dignity. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.