GrowthSpotting: The Art of Global Investing
This series cuts through market noise to explore what we believe are the most relevant and inevitable global trends for investors seeking growth.
In it, we take a closer look at what we think is a valuable framework for understanding growth drivers worldwide—our “MANTRA®” (Mass Affluence, New Technology, Restructuring and Aging).
Despite our increasingly bionic bodies and the longer life expectancy produced by them, the inevitable is still …inevitable. Death – and, if you’re lucky, taxes – is a sure thing for every one of us. So, with a growing population, the death business is undoubtedly a growth business. It is also a highly bottlenecked one. While everyone dies (“but not everyone really lives,” to quote my kids, quoting their favorite Braveheart line) few can process the bodies. One of those who can is a company called Dignity.
Dignity is the largest provider of funeral-related services in the UK and is a good example of the kind of company we like, one we have owned in the portfolio for several years. As a dominant provider of a necessary service in a constricted yet fragmented market, Dignity enjoys a potentially increasing stream of customers thanks to the UK’s aging population,1 strong pricing power, and the opportunity to acquire and integrate smaller competitors on mutually advantageous terms.
Dignity operates 600 funeral homes in the UK and 35 crematoria.2 Roughly 70% of people in the UK now choose cremation, as opposed to burial, far more than a generation ago, and yet the number of crematoria in the UK has grown by less than 10% over the past 25 years.3 The hurdles to building one are quite high given the “not in my backyard” attitude of the public towards them. Furthermore, operating them is becoming increasingly expensive due to environmental requirements.4 Thus Dignity has significant pricing power.
The majority of funeral homes in Britain are operated by small, independent owners. Many have inherited them and face succession issues as their children choose not to pursue the family business. One solution for such owners is to sell to Dignity, who have a lot of practice with integrating such roll-up acquisitions and retaining key staff, while increasing operating margins by applying best practices and scale benefits to operations.5
The pricing power adherent to Dignity’s dominant position in this inherently protected industry is evident in its gross margin, which has increased from 51% to 58% from 2005 to 2012. The company has steadily held EBITDA margins at more than 34% during the same time period to provide a 12% to 14% return on invested capital every one of those years.6
Looking at Dignity’s income statement, one would never know the UK has been experiencing its worst financial and economic crisis since the Great Depression. The company is in – dare I say it – the ultimate recession-proof industry.
- Office for National Statistics, UK.
- Dignity plc.
- Citigroup research.
- Investec Securities research.
The mention of specific companies does not constitute a recommendation by any Oppenheimer fund or by OppenheimerFunds, Inc. As of February 28, 2013, Oppenheimer International Growth Fund had 1.01% of its assets invested in Dignity. Holdings are dollar-weighted and subject to change.