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Don’t Delay! A Dirt-Cheap Dividend Payer That Could Rise Next Week

It’s not been easy being a Dignity shareholder of late, but finally there’re signs that the funeral director is beginning to turn the corner.

News in March that underlying pre-tax profit dived 30% (to £54.4m) in 2018 was a reminder of Dignity’s toils amid increased competition in recent times. Claims that UK undertakers have been taking advantage of bereaved families by charging extortionate prices has been a hot potato of late, and this AIM-quoted stock has been one of the biggest casualties as customers have taken their business elsewhere.

In Recovery?

In response to this, though, Dignity has launched a vast transformation scheme that’s seen it take the hatchet to charges, reducing the cost of its low-cost Simple funeral plan across the country and capping the cost of a full service funeral to £3,545 plus disbursements. Such changes have already had a significant effect as, after two significant market share slips in 2016 and 2017, the company’s take of the market edged up to 11.2% in 2018 from 11.1% in the prior period.

It’s early days in the soon-to-be-renamed undertaker’s turnaround story but it seems to have the wind in its sails again. Accordingly I’m expecting another reassuring update when first-quarter financials are released on Monday, May 13.

Hot Value

Now Dignity, by its own admission, is on course to print another earnings drop in 2019, though it’s expecting to bounce back into single-digit-percentage growth in the medium term. With its price and service repackaging programme still having plenty to deliver, and the positive impact such steps have made already I’m backing it to make good on this estimate, too.

A word of warning, though: in March the Competition and Markets Authority announced it was launching a full investigation into the funerals industry amid claims of customer extortion, and this could have a devastating impact upon the biggest players. According to the organisation, the average cost of a funeral has leapt 6% each year for the past 14 years in a row, double the rate of inflation in that time.

In its own words, however, Dignity has “engaged constructively” with the CMA on the issue and “strongly supports the opportunity to improve standards within the sector and meet the expectations of consumers.” And no doubt the company’s efforts to reduce costs will go down well with the body. To what extent the competition regulator deems the industry needs to be shaken up further, still, and how this will impact the Birmingham business itself remains a mystery though.

That said, I would argue that a low, low forward P/E ratio of 9.9 times reflects the risks created by the current probe, and that this multiple makes Dignity a very attractive share to buy today. Throw an inflation-bashing 3.6% dividend yield through to the close of 2020 into the equation, too, and I reckon the firm provides some pretty good value right now. And particularly so if my predicted share price rise of next week transpires.

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