Is Dignity plc a falling knife to catch after crashing 15%?

Paul Summers looks at whether today’s cautious outlook from Dignity plc (LON:DTY) is actually a great opportunity for new investors.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares in funeral services provider, Dignity (LSE: DTY) sank over 15% today as the company announced full year results to the market. Given that some of the most profitable investments are often those companies that offer services we can’t do without (and perhaps would prefer not to discuss), does today’s fall represent a golden opportunity for prospective shareholders to grab a slice of the company? Let’s take a look at the numbers.

Dead and buried?

At first glance, things really don’t look bad at all. Thanks to the number of deaths in 2016 being comparable to the year before (which were already significantly higher than normal), revenue at the £1.4bn cap grew 3% to £313.6m, with profits before tax rising by the same percentage to £71.2m.

For the company, this represented a better financial performance than expected. With 30,000 new sales of pre-arranged funeral plans, continuing excellent feedback from clients, 21 acquisitions purchased using existing cash resources and a 10% hike to the final dividend, the picture seems anything but gloomy.

So, what gives? Today’s fall is most probably down to the company’s cautious outlook for 2017. According to Dignity, historical data suggests that the number of deaths this year could be “significantly lower than in 2015 and 2016“. There’s also the indication of increased competition in the unregulated markets in which it operates, prompting Dignity to trim its underlying earnings per share growth rate for the medium term by 2% to 8% per annum. Given this, it’s perhaps understandable that many investors decided to jettison the company from their portfolios, at least for a while.

Personally, I think today’s negative reaction is overdone. The fact that the company is seeing increased competition is not necessarily a bad thing so long as it takes the necessary steps to defend its existing market share. As such, the company’s intention to invest in digital technologies to attract further business should be viewed positively. Moreover, the firm’s push for new regulation to ensure that grieving families receive minimum standards of care from all operators could — if successful — help to reduce the likelihood of more competitors entering the market.

Trading on 22 times forward earnings, shares certainly weren’t cheap before today’s results. However, its desire to continue building market share in what remains a fragmented industry coupled with its relatively price inelastic services convinces me that Dignity’s investment case remains solid.

A high growth alternative

If Dignity’s outlook causes you concern however, perhaps recent FTSE 100 entrant Rentokil Initial (LSE: RTO) may be a viable alternative. Over the last five years, the Camberley-based pest control company’s shares have performed superbly, rising 189% to 240p. For comparison, the index of which it is now a part has gained just 24% over the same period. Based on recent results, I think there could be more upside to come.

Back in February, the business reported a strong overall performance in 2016 with ongoing revenue and operating profit growth of 12.6% and 11.5% respectively. In addition to both numbers being in excess of the company’s stated financial targets, Rentokil also made a staggering 41 acquisitions and grew levels of free cash flow to £156m.  

All this, when combined with a rapidly rising dividend and December’s announcement that the company would — in conjunction with Haniel create “a leading supplier of workwear and hygiene services in Europe” makes me thoroughly bullish on the shares.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any shares mentioned. 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.

More on Investing Articles

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Is Rolls-Royce’s share price an irresistible bargain?

Is Rolls-Royce's share price the FTSE 100's greatest bargain today? Royston Wild explains why he would -- and wouldn't --…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Is the Vodafone share price a wonderful bargain or a horrible value trap?

As the Vodafone share price continues to fall, is it now a stock to buy with a view to a…

Read more »

Hand of a mature man opening a safety deposit box.
Investing Articles

I’d buy 95,239 shares of this banking stock to generate £200 of monthly passive income

Muhammad Cheema takes a look at how Lloyds shares, with a dividend yield of 5.9%, can generate a healthy monthly…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Can FY results give the Antofagasta share price a long-term boost?

The Antofagasta share price has had a good five years. Now the company says it's set to enter a new…

Read more »

Person holding magnifying glass over important document, reading the small print
Dividend Shares

Can I make sustainable passive income from share buybacks?

Jon Smith notes the rise in share buybacks from FTSE 100 companies, but flags up why they aren't great for…

Read more »

Front view of a mixed-race couple walking past a shop window and looking in.
Investing Articles

After the Currys share price rockets, here are more potential UK takeover targets!

The Currys share price has surged 39% higher in response to news of a takeover bid. Which UK stocks could…

Read more »

Investing Articles

Down 25%, where will the British American Tobacco share price go next?

The British American Tobacco share price has taken a hit. But this Fool isn't deterred. He think's now could be…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

2 cheap dividend stocks I’d snap up in a heartbeat!

This Fool is on the look out for quality dividend stocks and earmarks these two firms as great options to…

Read more »