For many years, it was a good idea to hold shares in Dignity (LSE: DTY), the UK’s only listed funeral-related services provider. The company was powering ahead in what looked like a defensive, cash-generating sector. And it was buying up smaller rival funeral service businesses at speed.
Why this FTSE share crashed
Then, in 2017, the firm surprised the market with a profit warning. It seems the lucrative niche occupied by Dignity had broken. Customers had parted with the traditions of decades and started shopping around for funeral service providers. And a great many related companies, old and new, were vying for the business.
The outcome was severe downwards pressure on Dignity’s selling prices. And the big problem was the firm had racked up a considerable amount of debt used to help fund its buying spree.
Almost overnight, it seems, the business model had fallen apart. The torrent of strong and stable cash flow was diminishing. And the economics of the business began to look precarious. It almost goes without saying the effect on the share price was devastating.
Fast-forward almost four years. Today, the firm released its full-year report covering 2020. I find that fact to be encouraging in itself because at least the company still exists. And since those hairy, scary events of 2017, the company’s been turning itself around. It moved from losses in 2018 to underlying profits every year since.
2020 was difficult for Dignity because of the pandemic. The UK death toll rose by 14% compared to the previous year. But the company faced additional costs and reduced trading opportunities because of the lockdowns. For a long time, large funeral gatherings were banned.
Weak earnings, strong cash flow
In terms of the underlying figures, revenue rose by 4% but earnings per share plunged by 23% compared to the prior year. However, cash from operations increased by 6% during the year. And that seems like a chink of light suggesting the downtrend in cash flow may have stabilised. The five-year financial record appears to back up that assumption.
The directors described the operating performance of the business as “robust”, despite the pandemic. And chairman Clive Whiley said in the report work continued on various projects aimed at enabling the business to self-heal, “without recourse to dilutive funding initiatives.”
Meanwhile, with the share price near 650p, the forward-looking earnings multiple is just below 18. However, shareholder dividends have been toast since 2018. But despite the lack of income from the stock, I reckon the business might have stabilised.
However, the industry is facing regulatory scrutiny that could result in tougher times ahead. And Dignity is still weighed down by a big load of debt as well as being embroiled in a boardroom battle instigated by its largest shareholder. So this stock opportunity still carries a lot of risk for investors. And my positive expectations are far from being a certain future outcome.
Nevertheless, I’m tempted to buy a few shares to hold for the long term.