Midlands-based Dignity, the only quoted funeral services group, is playing a leading role in the consolidation of a non-cyclical market. Given worrying wider economic uncertainties, this growing, profitable ‘undertaker’ perhaps represents the ultimate defensive investment, since nothing is certain except death and taxes.

Interim results to June from Dignity, which now owns 548 funeral locations and operates 23 crematoria in the UK, came in ahead of market expectations and further fostered positive City perception of the group, which floated on the Full List in 2004, raising a sizeable £113 million to repay expensive debt.

On turnover increased 12 per cent to £90.6 million, pre-tax profits moved 17 per cent higher, from £18.1 million to £21.1 million. Management, led by chief executive Peter Hindley, was keen to shine the spotlight on the 16.3 per cent earnings increase to 23.5p, on slower operating profits growth of 11.6 per cent to £29.9 million, which demonstrated the ‘beneficial leveraging effect’ of Dignity’s long-term fixed-rate debt. A dividend hike to 3.66p (2007: 3.33p) further cheered investors.

There are three strands to Dignity – funeral services, crematoria and pre-arranged funeral plans. Within funeral services, operating profits advanced 12 per cent to £25.3 million, buoyed by a strong turn from the funeral locations portfolio, which increased from 530 to 548 year on year, with acquisitions augmenting growth. Dignity carried out some 36,400 first-half funerals, versus 34,700 in the first half of 2007, equating to a market share increase from 12 per cent to 12.5 per cent, based on Office for National Statistics (ONS) estimates for the death rate. The performance of this division was particularly pleasing considering that the estimated number of deaths in Great Britain for the first half of 2008 gently declined to 286,600 from 288,700 a year earlier.

Despite rising fuel costs and a lower number of cremations carried out – 20,300 versus 20,600 – the UK’s biggest single crematoria business maintained its 7.1 per cent market share and achieved an 11 per cent operating profits advance to £8 million. Revenue growth to £14.7 million (2007: £13.2 million) reflected higher cremation revenues.

Hindley and the board also announced good growth within pre-arranged funeral plans, which give peace of mind to future clients and their families and represent a burgeoning bank of future incremental business. Unfulfilled plans increased to 200,000 (2007: 192,400).

Cash generation remained strong, increasing to £37.1 million (2007: £30.4 million), illustrating the group’s ability to convert operating profits into cash and helping Dignity reduce its significant net debt. All this despite £17 million worth of first-half spend on acquisitions in the form of nine funeral homes and one crematorium.

Investors can expect dignified and considered growth from Dignity, whose funeral homes provide an essential and non-discretionary service across the UK, generating new business through a strict adherence to high levels of considerate client service.

The only threats to growth (through market share gains, gradual price increases and acquisitions) would appear to be some unforeseen drop in the death rate, which is unlikely given that the profile of deaths closely follows ONS predictions, allowing Dignity to plan its business accordingly. Another variable is a future drop in the average income per funeral, again an unlikely occurrence.

Upgraded forecasts from Oriel Securities for the full year suggest a rise in adjusted pre-tax profits from £30.2 million to £35.6 million, producing earnings of around 39p. Estimates for 2009 point to £38 million-plus of profit and 42p of earnings per share, which means Dignity trades on fairly pricey forward earnings multiples of 19 and 17.5 times.

However, that analysis ignores a decent yield – dividend payments of 11p and 12.1p have been pencilled in by Oriel for this year and next – as well as the possibility of a special dividend towards the back-end of 2009.