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Despite falling profit, I think this share is worth investigating

With some companies, it could be said there is a link between how the business is performing and the health of the wider economy. Take housebuilders, for example.

With Dignity (LSE: DTY), the opposite might be true. This became apparent when it posted its latest results on Monday, showing that profits over the third quarter had slumped.

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The reason? The funeral-related service provider pinned it on a “significantly lower number of deaths, particularly in the first half of the year.”

Let’s have a look at the recent results, to see if there are any other concerns with the business.

Trading update

The significant decrease in the number of deaths when compared to the previous year is mainly due to the 12% drop in Q1. Otherwise, the number of deaths in 2019 is broadly in line with 2018, with a 1% decrease in Q2 and a 1% increase in Q3. If the number of deaths in Q4 also increases by 1%, 2019 would close 3.7% lower than the previous year, which would be the lowest number of deaths since 2014. So far this year, the number of deaths has fallen by 5% in total, from 455,000 to 433,000. 

This had a knock-on effect on Dignity’s results, with year to date like-for-like revenue dropping 8% and year to date like-for-like operating profit decreasing by 30%.

Dignity stated that its posted results were in line with expectations.

Of course, the number of deaths is out of Dignity’s control. Is the underlying business strong and is now a good buying opportunity?

It’s shares are down 1.2% as I write but staggeringly, over three years, the price has fallen by 79%, making the price-to-earnings ratio an attractive 6. The prospective dividend yield is 4.5%.

Why has the share price dropped so much in the past three years?

Competition

Three years ago, after strong growth, the share price hit an all-time high of 2,900p. But as my colleague G A Chester notes, Dignity kept pushing its prices up beyond the rate of inflation, allowing competitors to offer cheaper alternatives.

The company responded to competition with a turnaround plan, introducing new prices and products that target different parts of the market, and cutting prices for simpler funerals. In its trading update, Dignity stated that the “funeral market continued to show a positive response to the group’s updated service offering and price points introduced since January 2018.” The group performed over 52,000 funerals in the first 39 weeks of the year.

Excluding Northern Ireland, this represented a market share of 11.9%. In 2018, it was 12.1%.

Figures published by the Office for National Statistics, which forecasts an increase in number of deaths from 2020 by approximately 20,000 per year, reaching 740,000 in 2040.

The fly in the ointment for Dignity might be an investigation being conducted by the Competition and Markets Authority into the funeral and crematoria sector. The group has welcomed the investigation and is cooperating fully.

Will this trading update tempt me into buying shares? I think the company has a dominant market position at the moment, but competition in the sector remains fierce and although market share remains stable, this hasn’t increased over this period.

Investors should be reasonably pleased with its latest results, but I think buying shares in Dignity carries risk. 

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T Sligo 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.