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Why InvoCare Limited’s (ASX:IVC) earnings could be about to soar

InvoCare Limited (ASX: IVC) released its AGM presentation today to investors.

The CEO started off by reminding shareholders that InvoCare has delivered a total shareholder return of more than 18% per annum since listing. In 2017 the operating earnings grew by 10.6% to $63.5 million.

InvoCare said that it currently intends to continue with its long standing practice of a dividend payout ratio of more than 75% of operating earnings after tax.

Investors were recently shocked when InvoCare said that its operating earnings wouldn’t do much in 2018. Indeed, the company is expecting operating earnings before interest, tax, depreciation and amortisation (EBITDA) to be flat and operating earnings per share (EPS) could show a slight decline year on year.

In this market update InvoCare did say that it is currently anticipated that this profit forecast could allow the Board to consider a full year dividend in line with 2017. Hopefully this means a slight increase, even it it’s only 1%, so that the increase streak continues for another year.

InvoCare has said that customers are requesting an increasing range of services including longer and more bespoke funeral services, greater AV support like web streaming and videos, more catering options for food and beverage, onsite celebration lounges, more flexibility for viewings and services (eg weekends and evenings) and online grief support and memorialisation.

To cater for this InvoCare is going to spend $200 million refreshing and upgrading its locations. When you see the change InvoCare has completed in Dandenong (page 17 to 20 of the ASX release), it’s easy to imagine that the location will generate more earnings.

The company believes that all of these upgrades, which will hurt in the short-term, will lead to sustainable double-digit EPS growth in the long-term.

InvoCare is also working on a shopfront strategy. The idea is that people are willing to travel up to 30 minutes for the funeral, but only 15 minutes to arrange the funeral. So, if a shopfront is established in a busy area it should mean that those funerals can be directed to an existing InvoCare hub.

Management believe that InvoCare can increase its market share from around 33% to 40% in existing markets with the above strategy.

Foolish takeaway

InvoCare is currently trading at 22x FY19’s estimated earnings with a grossed-up dividend yield of 5.2%. The next year or so could be volatile for InvoCare’s share price, but I believe the long-term growth looks more assured with the investments it’s currently making. I’d be happy to buy more InvoCare shares at the current price.

I’d also be happy to buy more shares of ones of these top stocks which is also benefiting from Australia’s ageing population.

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Motley Fool contributor Tristan Harrison owns shares of InvoCare Limited. The Motley Fool Australia has no position in any of the stocks mentioned. 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 Scott Phillips.

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