Is your portfolio ready for the aging population?

Invocare (ASX: IVC) is a company that owns and operates funeral homes. It has 231 funeral homes, 14 cemeteries and crematoria, almost 1500 employees and after-tax operating margins of about 11.5%. The company has quite a number of brands, and its employees are involved in various industry bodies. Capital expenditure includes refurbishment and acquisitions.

One trend that is having an increasing impact on the business is the growing number of customers pre-paying for their funerals. This is advantageous in the sense that the business will not go elsewhere and Invocare invests the float. Of course, that means Invocare increasingly relies on the proceeds of investment to generate profit.

However, by making these arrangements in advance, individuals can choose what they want to spend. It is my opinion that the majority of people that would use Invocare’s services are likely to choose to spend less on their funeral than their family members would otherwise spend. I believe this trend may reduce the amount spent per funeral in the long term. However, I may simply be naive about how families work!

Invocare has not historically specialised in managing investment funds, yet this is precisely the activity it is moving into. It requires a return on pre-paid funeral funds in order to be able to fund the liabilities it has created. Further, the longer people live after they have finished paying for their funeral, the more important the returns (or lack thereof) on that money will be. Keep in mind that when the baby boomers start passing away, it would seem logical that funeral costs will go up due to increased demand.

The real turn-off for me however is the fact that the company has only $350 million of pre-paid funds under management, but has pre-paid liabilities of $355 million. On top of that, the company has $224 million of interest bearing debt. The real problem with this situation is that were there to be an opportunity, Invocare is not really in the position to swoop. Given the vicissitudes of time, long-term investors should generally have bias towards debt-free companies.

Indeed, the company pays over 25% of its operating cash-flow in interest, but pays considerably more as a dividend. Certainly this should please income-seeking investors, and goes some way to explaining the strong share price. At current prices it trades on a trailing yield of about 2.9%.

While the shares aren’t ridiculously overvalued, they would have to drop by at least $3 to interest me. On the other hand, investors with self-managed superannuation funds should put Invocare on their watchlist. As a company with industry tailwinds that pays a solid dividend it could be a good one to pick up on a general market swoon.

Foolish takeaway

Identifying industry tailwinds (such as the aging population) can be an interesting way of generating investment ideas, but ultimately you must look at an individual company. If you can’t buy a certain share at an attractive price, you don’t have to, and part of what I’m learning is that patience is an important part of investing.

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Motley Fool contributor Claude Walker does not own shares in any of the companies mentioned in this article. Find him on Twitter @claudedwalker.

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