This defensive stock is in an ‘untouchable’ industry. Here’s why I’d buy

Jabran Khan explores a stock that has the ultimate defensive quality and why he thinks this could be a market crash bargain.

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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

Defensive industries can be excellent investments in good times and bad with businesses that are stable or immune to economic fluctuations. 

One such industry is that of funeral care. Major name Dignity (LSE:DTY) is a defensive stock and in my opinion is a market crash opportunity. Despite the issues it has had in recent times, I feel it could be a good opportunity right now. 

Defensive abilities despite ups and downs

Demand for funeral services may fluctuate but will never cease, hence the defensive quality. DTY is one of the UK’s largest providers of prearranged funeral plans. It provides access to a network of national funeral locations where personalised packages can be tailored to an individual’s needs. It’s also the largest operator of crematoria in Britain.

So what are the issues it has faced of late? Well, Dignity and other funeral providers had continued to push prices up. This seemed to work as 12 years after its initial floatation in 2004, the shares had risen more than tenfold and it was valued close to £1.5bn. It was also a member of the FTSE 250.

But in the last two years or so, the wheels came off somewhat as lower-price competition grew and the share price started to deline. An investigation by the Competitions and Markets Authority (CMA) into funerals and this year’s stock market crash didn’t help either. The share price plunged again and it seemed like it might be the proverbial nail in the coffin.

At the time of writing, the shares can be purchased at nearly 500p each. Yet at their lowest point, the shares could be picked up as cheaply as 230p. Government price-cap plans being put on the back-burner have helped the price to rise. But 500p per share is still dirt-cheap in my opinion and represents an opportunity.

Performance

At the end of July, DTY released a trading update for the 26 weeks to 26 June. There were some positive results, despite tough market conditions. Revenue and profit were up by 12% and 21% respectively compared to the same period last year. Cash generated from operations was up 3%. These results were linked to the fact that, sadly, there were 23% more deaths compared to the same period last year.

Full-year 2019 results saw DTY turn over £339m and generate a pre-tax profit of £44.1 million. But with the economic downturn in full effect, its dividend was cancelled and may not return before 2021 at the very earliest. This might put people off, although I would preach patience here. 

My verdict

My overall feeling is that DTY is in an almost untouchable industry. Its business model isn’t complicated and demand will never end. I also feel the economic downturn will mean smaller funeral care companies may not survive. Ultimately this could offer Dignity increased market share.

At its current share price, I think DTY is a good defensive stock opportunity. The price is very cheap, but there’s an element of risk involved, of course. It may not be one for everyone, but it’s one I think suitable for somebody willing to buy and hold.

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.

Jabran Khan 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.

More on Investing Articles

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »