For personal reasons, I've never bought into InvoCare Limited (ASX: IVC) despite me being fully aware of this outstanding business now for a number of years.
These personal reasons I'm talking about here are not to do with valuation however; it's what InvoCare does that's always sat a little awkwardly with me, given that the company specialises in the ownership and operation of funeral homes, cemeteries and crematoria around Australia, New Zealand and Singapore (with smaller operations in Hong Kong and the USA).
You may have heard of Simplicity Funerals, and White Lady Funerals which are the two national funeral brands owned by InvoCare (don't you just love the term 'funeral brands'?).
You see, I hate to be reminded of the inevitable when I look at this stock, but I now realise that passing up on buying shares in InvoCare over the last decade has left me a lot poorer.
Not only have the economic returns been quite good, so has the regularity and reliability of its business performance. Which has led me to ask the question, is this the most reliable stock on the ASX?
For a number of reasons, I think yes.
In percentage terms, and with dividends included, shareholders who had bought in or near the float back in December 2003 have enjoyed a compound annual growth rate (CAGR) of approximately 22.5%.
For those of you who like a visual representation of how the company's stock has performed since it floated at $1.85, here's its chart:
Source: Westpac
As shareholders don't just bid the shares up over time like this without justification, the trajectory of the share price above is no accident.
So, what's the big deal with this company, and why has owning the shares been so rewarding? Here are a few reasons.
Demographic tailwinds
Australia and other countries in which InvoCare has operations have ageing populations where there's an expected 1-3% annual increase in deaths.
Business model
The company's reason for existing of course is to help families celebrate and farewell the lives of their loved ones, but the company also earns trailing commission revenue on the prepayment of funeral costs by customers. These prepayment amounts were valued at $422.3m at the end of the 2015 financial year which was an increase over 2014 of 5.3% and allows the company to earn investment revenue on these prepaid monies.
Add to this an increased memorialisation of sales in their cemeteries and crematoria, a continued domestic and international acquisitions strategy, and an ability to regularly increase prices and you end up with a robust business model that almost guarantees real growth in shareholder returns over the long-term.
Capital allocation
Over the last 10 years, management have kept share issuance to a minimum and have reduced the amount of debt on the balance sheet. Although debt can still be considered quite high with a net debt/equity ratio of 115%, the net interest cover is quite healthy at a ratio of 6.7 times finance costs (as per the recently-released half year results to 30 June 2016). In any event, with such a stable business model and ultra-low financing costs, the company can afford to take on a reasonable amount of debt without keeping shareholders awake at night.
Runs on the board
Sales and revenue have compounded annually at a rate of 9.24% and 10.48% over the 10 years to December 2015, with earnings-per-share rising a respectable 8% per annum. Return-on-equity (ROE) is strong at 27% and although this has dipped from as high as 47% 10 years ago (perhaps partly explained by a lower equity base back then), ROE is still expected to maintain an average of over 20% over the next three years.
Foolish takeaway
On the business performance side-of-things, it could be argued a lower payout ratio (currently around 80%) could be justified if this meant they could rely less on their creditors, but the company's debt seems to be managed well.
Valuation? As always, these shares look expensive, but perhaps this is for good reason. There's been a fall in the share price from a high of $14.66 back in late July to around $13.27 more recently that makes the shares slightly more affordable.
Perhaps the best way to buy these shares is to split your capital into thirds and buy the shares opportunistically whenever there's a fall in the share price. If you're buying shares with a 5-10 year investment timeframe, I see no reason why buying these shares today would be a bad move, especially given there's a fully-franked dividend yield on offer of approximately 2.9%.
Overall, the defensive nature of this business should ensure good returns from here over the next decade.
