Dignity 'calm', but outlook is grim

Despite profiting from an industry with guaranteed workflow, Dignity's share price is in poor health. 

Even if Dignity (LSE:DTY) has vowed to remain "calm and helpful", investors were far from relaxed today as the reality of an 18-month competition inquiry and threat of price controls hit home.

Shares in the funeral services business, which was once regarded as among the safest stocks on the London market, fell as much as 4% today and have lost two-thirds of their value since early 2018.

As well as an industry-wide pricing investigation by the Competition and Markets Authority (CMA) - which was confirmed today - Dignity has been hit by a big rise in the number of funeral directors operating at a time when the UK's death rate has hardly changed.

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This forced Dignity to rip-up its pricing structure at the start of last year in the hope of creating a platform for steady growth in future years. The company has also been proactive in welcoming the CMA investigation as a positive for its long-term prospects if it improves standards overall and removes less scrupulous operators from an unregulated sector.

While it has engaged constructively with the CMA ever since the market study was launched in June, Dignity told shareholders this month that it would not be focusing on the "inevitable twists, turns and comments that such a process will trigger".

CEO Mike McCollum said in annual results:

"We will remain calm and helpful throughout what could be a high profile and testing period, ensuring that the CMA sees all sides of any issues."

He said his company's response to the industry upheaval would continue to be a lower-cost model built around recognisable national brands associated with quality.

However, the fear amongst analysts and shareholders is that Dignity could end up being caught in industry cross-fire if the CMA decides to impose some form of price control.

The list of concerns highlighted by the CMA certainly won't help the cause, with the watchdog reporting that the essential elements of organising a funeral have increased 6% each year - twice the inflation rate - for the last 14 years.

It adds that the vulnerability of many people when organising funerals had made it easier for firms to charge high prices. A lack of transparency also presented difficulties when trying to compare different funeral directors.

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While the CMA notes that a number of chains have subsequently introduced lower cost funeral options, it questions whether this goes far enough to make up for years of above-inflation price hikes.

Dignity has 831 funeral locations in the UK, with most trading under local names. During 2018 it conducted 72,300 funerals, up from 68,800 in 2017 and giving it an 11% share of the market.

In the final quarter of 2018, its average income per funeral reduced to £2,897 from £3,222 in 2017. It expects the average for 2019 will be closer to £2,940. Dignity also has 46 crematoria.

The pre-paid funeral plan market is also under pressure, with sale volumes for providers registered with the Funeral Planning Authority down 15% in 2018 to 177,000.

Consumers have become wary of the pre-paid market following heightened negative press surrounding poor industry practices and the Treasury announcing a consultation considering formal FCA regulation of the market. 

On a brighter note - for Dignity investors at least - the number of deaths in the UK is starting to rise again, with the figure for 2018 up 2% to 599,000. The Office for National Statistics thinks this could peak at 700,000 deaths a year by 2040.

However, that's unlikely to sway the City at a time of continued CMA uncertainty. Peel Hunt, for example, has a 'sell' recommendation on Dignity with a price target of 700p.

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