Death and taxes may be guaranteed but the business of death is not.
Shares in Dignity, the UK’s only listed undertaker, are now a quarter of what they were in 2016 amid market and regulatory uncertainty.
Not so long ago, Dignity was dubbed an unregulated utility. The funeral business had the investment virtue of selling must-have services on fat margins, enabling it to pay out a steady and rising annual income to shareholders and lenders.
Five years ago the predictability of its cash flows enabled it to raise about £590m — about 1.5 times the current value of the group’s equity — in 30-plus year bonds. Interest and repayment charges were fixed at about £33m a year. Many a small business looked on in envy.
That was a high point for the group.
Just over a year ago, Dignity’s main competitor, the Co-operative, cut its prices. Dignity followed suit, chopping charges for its cheapest undertaking rather than lose market share. That triggered a profit warning and a sharp fall in its share price.
Last week, the company, which conducted about 70,000 services last year, revealed just how sharply market share falls and more low-cost funerals had hit profitability last year. A 3 per cent decline in revenues led to operating margins dropping 3 points to 28 per cent. Pre-tax profits plunged 43 per cent to £40.5m.
Higher spending to maintain market share will squeeze margins again this year, the group said. Analysts now expect earnings before interest, tax, depreciation and amortisation, which were £124m in 2017, will be nearer £90m this year and next.
That is still comfortably above loan covenant thresholds — 1.5 times debt servicing costs — but the direction of travel is worrying.
At the same time the Competition and Markets Authority plans to shake up the undertaking industry and begin a full-scale investigation into the funeral services market this summer. The Treasury also plans to draw unregulated pre-paid funeral plans, where consumers pay for burials or cremations years in advance, within the reach of the Financial Conduct Authority.
The CMA’s beef is that consumers arranging funerals are at their most vulnerable and the price of essential elements has risen 6 per cent a year, twice the rate of inflation. In November the CMA accused the UK’s largest funeral directors of lifting charges by up to 8 per cent a year for nearly a decade, suggesting these increases had been driven not by quality improvements but to meet investor expectations. The CMA singled out Dignity’s top-of-the-range profit margins.
Mike McCollum, Dignity’s chief executive, doesn’t dispute that arranging a funeral is the ultimate distress purchase, or that charges lack transparency. The market was very localised, he said. Dignity’s biggest competitors are not big national chains but the thousands of small, neighbourhood outfits that dot British high streets.
Building crematoria is heavy on capital spending but otherwise the barriers to entering the funeral market are low. Funeral directors don’t need to display their credentials or make sure their parlours meet regulated standards. Some don’t even have refrigeration facilities.
Last year’s price cuts just show how strongly competition works in the industry, he argues. And the price rises before that are a feature of the cycle of mortality.
A heavy proportion of funeral businesses’ costs were fixed, Mr McCollum explained. That drove up the average cost per funeral as deaths in the UK fell from about 700,000 a year in the 1980s to about 550,000 five years ago.
As baby boomers age, annual deaths will rise back up to 700,000 by 2040, according to statisticians, allowing undertakers to spread their costs and drop their prices. The price rises of the past were over for now, said Mr McCollum.
The UK’s trust buster rightly doesn’t buy it, though, adding last week that it is minded to extend the scope of its investigation to pre-paid funeral plans. It worries that most people remain open to exploitation and the drivers behind past price rises are unchanged. The CMA said: “Our views are supported by the plans and forecasts of the large funeral directors,” and evidence that private crematoria continue to plan for consistently high annual price rises.
The regulator seems sure of its territory, which leaves Dignity’s shares on shaky ground for a good while yet.