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5 reasons why I think InvoCare Limited is the best defensive business on the ASX

InvoCare Limited (ASX: IVC) is a funeral and cemetery operator with a market capitalisation of $1.61 billion.

It isn’t an exciting software stock or a rapidly expanding healthcare business, but I think it could be one of the best companies to own over the next 10, 15 or 20 plus years due to the following reasons:

There are only two things certain in life

As the saying goes, death and taxes are unavoidable. InvoCare provides an essential and emotional service to the affected family for a sadly inevitable event. A certain number of Australians and New Zelanders die every year, this provides a defensive and reliable source of earnings for InvoCare.

Market share

InvoCare has a number of different brands to appeal to different areas of the funeral market. For example, it has the White Lady Funerals brand to appeal to larger budgets whilst it has Simplicity Funerals and Value Cremations to appeal to families with a smaller budget. It also has a number of regional brands too.

This multi-pronged approach has meant InvoCare’s market share is around a third of the Australian and New Zealand markets. Governments don’t love companies dominating industries, but it is quite common with businesses such as Telstra Corporation Ltd (ASX: TLS) and Challenger Ltd (ASX: CGF) as examples.

Great results

InvoCare has been producing pleasing results year after year. In its latest result to 31 December 2016 it revealed a 11.8% growth of operating earnings per share (EPS). This is a strong result for what is supposedly a slow-growing business.

Its 2012 full-year operating EPS was 38.8c per share and its 2016 full-year operating EPS was 50.4c, a growth of 30%.

In fact, management have grown the business impressively since it first listed on the ASX. On the 5 December 2003 its share price was $1.90, today it has grown to $14.64 which is an amazing 670% growth.

InvoCare share price graph (Source: Google Finance)

Looking at the past is interesting, but it’s the future that’s important.

Rising death rates

The key reason to be interested in InvoCare is the inevitable growth of the death rate. Australia’s population continues to grow every year, increasing the number of potential customers. However, it’s the ageing population demographics which will likely benefit InvoCare the most over the next few decades.

Warren Buffet often promotes the idea of being patient with your investment. The following graph of the Australian Bureau of Statistic’s prediction of deaths in Australia up to 2050 shows why InvoCare could be the perfect buy and hold investment:

(Source: InvoCare investor presentation)

The death rate is predicted to increase at a faster rate each year until at least the mid-2030s. Considering operating EPS grew by 11.8% last year with a slower death rate than the future, it’s fairly easy to imagine that EPS will be growing at a much faster rate in a few years.

Dividend machine

InvoCare has relentlessly increased its dividend every year since 2006. In April 2007 it paid a dividend of 11.5c per share and in April 2017 it paid a dividend of 25.5c per share, more than doubling its dividend in 10 years.

Risks

One key risk to InvoCare is if it has too much debt on its balance sheet. Its latest report showed that the interest cover was 10.1x (up from 8.3x) and its gearing was 2x adjusted earnings before interest, tax, depreciation and amortisation (down from 2.1x). The debt is becoming safer as time goes on.

Valuation is another risk. I think InvoCare is worthy of its higher earnings multiple due to its safety and growth prospects. On 5 May 2013 it was trading at 30x FY12’s operating earnings. On 5 May 2015 it was trading at 32x FY14’s operating earnings. It is very regularly trading at a high earnings multiple.

Foolish takeaway

Invocare is currently trading at 29x FY16’s operating earnings with a grossed-up dividend yield of 4.15%. I think it could be one of the best and most consistent defensive stocks over the next few decades, which is why I’m an InvoCare shareholder and will look to increase my holding if any opportunities present themselves.

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The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Telstra Limited. Motley Fool contributor Tristan Harrison owns shares of Challenger Limited and InvoCare Limited. The Motley Fool Australia owns shares of Challenger Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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