There was a time when funeral services provider Dignity (LSE: DTY) felt like one of the safest stocks on the market.
That all changed about 18 months ago when the company was required to cut prices to stave off competition. The more recent announcement of a probe by the Competition and Markets Authority (CMA) into the sector only served to compound investors’ misery. Dignity’s share price was 70% lower yesterday than it was back in November 2017.
While I remain positive on the company as a whole, there wasn’t much in today’s full-year results to suggest that this is poised to spring back to life any time soon.
“A period of radical change”
Despite a 2% rise in the number of recorded deaths to 599,000, pre-tax profit dived 43% to £40.5m over the 12 months to 28 December as Dignity reduced its prices and unbundled its full-service package so that clients weren’t required to buy everything from the company.
Good performance from its crematoria division was the only bit of positive news I could find, aside from the business maintaining its total dividend at 24.38p per share (for a trailing yield of 3.4%).
Reflecting on today’s numbers, CEO Mike McCollum stated that last year “marked the beginning of a period of radical change” for Dignity. He went on to say that the firm’s commitment to the quality of the service it provides gave him confidence that the £370m cap will get “ahead of the competitive curve“.
While that remains to be seen, I agree that regulatory pressure can be a blessing to established firms by removing less competent competition, while tacitly endorsing the services of the former.
Before this morning, Dignity’s stock was trading on a little under 11 times forecast earnings for the current financial year. The fact that the share price (while lower) hasn’t fallen off another cliff suggests that today’s figures were pretty much as expected.
As such, I suspect that those who bought in after recent falls and are patient enough to stand by the company will be rewarded in time. It’s a ‘hold’ for me.
In the doghouse
Like Dignity (and based on its January trading update), a sustained recovery still looks some way off.
Despite reporting a 23.7% increase in total sales over the first half of its financial year, the company “remains heavily reliant on locum cover” and costs relating to this are “well above” those of the previous year.
Combine this with news that its new divisions focusing on Farm and Equine practices haven’t been performing well, a growing net debt position and the prediction that full-year earnings will be “materially below current market expectations,” and it’s easy to see why investors are turned off.
Nevertheless, this could still be one for patient contrarians. A reduction in locum costs is expected in the remainder of the year and the company has wisely decided to re-evaluate its pipeline of potential acquisitions. Despite recent share price falls, there’s also the fact that the services provided by companies like CVS are likely to remain resilient in the event of an economic downturn.
The company will confirm its interim results on 29 March.
Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.