One sector that isn’t very well known among investors but that can provide a source of stability and even significant capital gains is the death service industry.
People don’t like to think about mortality, but death is a fact of life. Everybody dies, and in addition to the grief it causes, it comes with a hefty bill. Funerals cost thousands of dollars, as do caskets and cemetery plots. Yet despite this expense, it is one of the most essential purchases that people make. Even if money is tight, people find a way to pay for honoring and remembering their deceased relatives.
Given these points, the death service industry is incredibly recession-proof.
While this has typically been an industry that has been owned by individuals and that has been very localized, we are seeing more funeral homes and cemeteries falling into the hands of publicly traded companies. Some of the main participants are:
- Service Corp. (NYSE:SCI)
- Matthews International (NASDAQ:MATW)
- Hillenbrand (NYSE:HI), a conglomerate that has a death services segment
- Carriage Services (NYSE:CSV)
- StoneMor Partners LP (NYSE:STON)
Generally, these are small companies. The largest of these is Service Corp., with a market capitalization of $4 billion. The smallest, Carriage Services, has a valuation of just $325 million. However, as I have suggested, these are relatively stable investments.
They also offer good value compared with the S&P 500, although their trailing price-to-earnings ratios appear to be somewhat elevated. For example, Service Corp. trades with a trailing P/E ratio of 28. But going forward, the company is expected to see modest revenue growth and, more importantly, margin expansion. This means that the stock trades at just 18 times 2014 earnings estimates and at 16 times 2015 earnings estimates. If you are willing to venture out and consider Carriage Services, this stock trades at just 15 times 2014 earnings estimates and 13 times 2015 earnings estimates.
Before investing in these stocks, it is crucial to understand the nature of the cemetery part of this business. When somebody buys a cemetery plot, s/he pays a large upfront fee in exchange for many years of upkeep. Thus, when a company such as Service Corp. receives a payment for a cemetery plot, it invests the money in much the same way an insurance company invests insurance premiums.
Therefore, these companies own a lot of securities, and a part of the decision to invest in one of these companies needs to be based on its ability to generate investment returns. Typically, these companies put most of their investments in bonds, although about 20 percent of these assets typically go into stocks.
Thus investors should consider the nature of these portfolios and how leveraged these companies are. For instance, Service Corp. has a fair amount of leverage — $12 billion in assets versus $1.4 billion in equity. Matthews International has far less leverage, with about $1.2 billion in total assets versus $560 million in shareholder equity. Like with any leveraged asset, the more leverage it utilizes, the greater the potential for returns during the good times, but the greater the potential for losses during the bad times.
Investors looking to invest in this sector should look carefully at both the company’s funeral home and cemetery assets while being mindful of its financial assets. Service Corp. may be the largest in the sector, but a company like Carriage Services has less leverage and faster growth, and it is probably a lower-risk investment despite its very small market capitalization.
Ultimately, investors aren’t going to make a lot of money in the death services industry, but there is no denying that these companies provide an essential service to society, and I think that a diversified portfolio should include some exposure to this sector.
Disclosure: Ben Kramer-Miller has no positions in the stocks mentioned in this article.