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

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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. 

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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.

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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.

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