One of my favourite ever headlines from The Onion was World death rate unchanged at 100%, and as long as that remains true, the long-term customer base for Dignity (LSE: DTY) seems pretty much guaranteed.
Earnings per share almost doubled at the UK’s’ largest funeral operator between 2012 and 2016, and investors piled in and created a typical growth spike, The share price soared, but from round the middle of 2015 it’s been pretty flat, and today stands at 2,552p.
Early earnings growth looks set to cool, with analysts expecting just a 4% rise this year, but Wednesday’s interim results suggest that might be beaten.
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With revenue up 7%, pre-tax profit rose by 9% and earnings per share gained 10% — and the interim dividend was lifted by 10% too. The firm invested £23.4m in 14 new funeral locations and one crematorium, so growth by acquisition is still going well.
Too expensive?
We’re looking at a fairly high P/E valuation, of around 18.5 on 2018 forecasts, but I think that’s justified on several counts. One is the safety aspect of the stock, as Dignity is providing an essential service that’s not going to go out of fashion.
But the bigger attraction for me is the dividend. There’s a yield of only 1% on the cards for this year, so you might think I’m mad picking it as a dividend investment. But the mooted 26p per share would represent a 61% hike since 2012’s payout of 16.1p, and that’s the kind of progressive dividend I like to see.
What’s more, it’s extremely well covered by earnings — in 2016, cover stood at five times, and this year’s forecasts suggest 4.8 times. I can see a growing cash stream over the next decade.
Back to health
My second dividend pick today is Devro (LSE: DVO), a major supplier of collagen casings for food — and where would sausages be without those?
Devro has seen earnings faltering a little in recent years, but analysts have favourable views about the future. And significantly, a dividend that’s been stuck at the same level for four years looks set to resume its upwards course — predicted rises of 4% this year and 1.6% next would provide yields of 4.2% and 4.3%, and they’d be decently covered.
First-half results released Wednesday paint a mixed picture. Although revenue rose by 11% and underlying EBITDA came in 16.7% ahead of the same period last year, underlying EPS dropped by 4.8% and we saw no lift to the half-time dividend.
Healthy future
But Devro’s efforts are targeted at the longer-term future, and we heard of strong volume growth in China, South East Asia and Russia — and recently opened production facilities should help cope with that demand.
Cost savings have been going well, and coupled with the company’s strong cash flow, chief executive Peter Page believes Devro should be able to get net debt covenants back to “historic levels over time.“
Expectations for the full year are unchanged, so forecasts for a flat year for earnings are probably about right — with the firm’s strategy expected to bring in earnings growth in 2018.
And in my view, we should see more cash being returned to shareholders via rising dividends over time too — I could see the next decade providing a significant increase in the yield for those buying at today’s 221p price levels.
