BULL POINTS:
■ Solid growth profile
■ Largest operator in UK
■ Track record of cash returns for shareholders
■ Growth by acquisition and organic expansion
BEAR POINTS:
■ No guarantee on timing of acquisitions
■ Variation in death rates
There is a wonderful certainty about the business of Dignity, which should appeal to Isa investors wanting to lock away capital for the long term - and it's spiced by a track record of returning capital to shareholders.
Indeed, since Dignity's introduction to the stock market in 2004, two major returns of capital plus regular dividends mean that, according to management, investors have effectively had their initial investment returned to them and now hold shares worth double the level at which they floated. The company illustrated its commitment to capital returns last year when a bond refinancing - management's preferred method of raising cash for shareholders - allowed the company to return 100p a share. And chief executive Mike McCollum is willing to repeat the trick in the future.
| IC TIP RATING | |
|---|---|
| Tip style | Growth |
| Risk rating | Low |
| Timescale | Long term |
| What do these mean? Find out in our | |
Meanwhile, the company's operational performance remains strong. Results for 2010 showed a seventh consecutive year of growth in underlying operating profits, cash generation and earnings per share. And the figures prompted City analysts to upgrade their forecasts for profits and EPS for the next two years.
Dignity owns 567 funeral parlours, which gives it an 11.5 per cent share of the UK's fragmented market. During 2010 it added nine locations through acquisition and opened 18 new branches, which can lever off resources already available. Further acquisitions are in the pipeline, with three completed in the first quarter of 2011, although timing is difficult to predict as many acquisitions rely on the retirement of owners. Management hopes to open 20 new branches in 2011. Because they are close to existing operations, these require a relatively small capital cost. Funeral services generate more than 70 per cent of total revenues and in 2010 their underlying revenues grew by 4 per cent.
| ORD PRICE: | 743p | MARKET VALUE: | £407m | |
| TOUCH: | 741-743p | 12-MONTH HIGH: | 745p | LOW: 586p |
| DIVIDEND YIELD: | 2.2% | PE RATIO: | 13 | |
| NET ASSET VALUE: | Negative | NET DEBT: | £311m | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 176 | 35.4 | 38.8 | 11.0 |
| 2009 | 185 | 37.5 | 41.8 | 12.1 |
| 2010 | 199 | 39.8 | 46.9 | 8.9 |
| 2011* | 202 | 40.0 | 52.0 | 14.6 |
| 2012* | 214 | 44.0 | 57.0 | 16.1 |
| % change | +6 | +10 | +10 | +10 |
Normal market size: 1,075 Matched bargain trading Beta: 0.3 *Peel Hunt estimates | ||||
The group is also the UK's largest operator of crematoria, owning 33 out of 260 across the country. During 2010 it opened one new crematorium, acquired another and took over the running of a third for a local authority. Two crematoria are expected to open in 2011 and further opportunities for partnerships with local authorities may arise as local government looks to save costs.
The final leg of the business is providing pre-paid funeral plans, an operation that has grown strongly over the past two years despite straightened economic times. Sales of 238,000 plans in 2010 represented a record performance and 10 per cent up on the previous year, contributing profit of £2.8m. Mr McCollum expects this growth to ease this year, but reckons funeral plans will continue to contribute around 10 per cent of group revenues.
