The first thing I will comment on is that if you look at the image I have put on this article, it should come with a question mark at the end.
If you have followed my writings for any length of time you know that I like to try to spot trends and then hypothesize on what those trends may mean in the future. Sometimes trends show the future and sometimes they sputter out and become short term changes of habit that don’t become the future. There is a lot of guessing in looking at what trends become human and/or consumer norms.
Today, I am going to touch on some things I see happening and let you decide if what I present will present a shift in behavior that may, as we look back twenty years from now, signal the beginning of a shift in how funeral service operates.
In the corporate world the use of technology is trending to change some things. Take, for instance, air travel by corporate employees. I heard Cisco (described as a hardware, software, and telecommunications company) CEO Chuck Robbins talk today about the company’s latest strong quarter and part of the reason was that they have been busy building the infrastructure for companies installing “high definition” video equipment in corporate offices worldwide. Robbins believes that this “trend” could have a very detrimental effect on airlines and the airline business as these employees will be video-conferencing in much greater number and flying to see associates or customers much less.
Much like that technology trend possibly affecting airlines, here’s where I see some trends emerging that may affect the death care industry:
Funeral/Memorial Services: The COVID-19 pandemic has required funeral services to be conducted in a different way. Social distancing rules have limited attendance at services and the thought of traveling great distances for services has been curtailed. This has led to client families not holding celebration/funeral/memorial services or visitations in many instances.
And, what will the continued drop in church membership do to those services going forward. We’ve shown this graph before, but it bears seeing again as we believe that formal religious recognition is one of the great indicators of a family’s “service” decision.
In other instances, the use of technology has allowed for these services to be seen by those not in attendance. . . .many times with mixed reviews. On the positive side, we have heard public companies like Service Corporation International and Dignity Plc report that while deaths with services slid early on in the pandemic, they are starting to get their numbers closer to pre-pandemic numbers.
Will families question, however, more and more the value of theses services for the price paid? Or, will they believe that they can bring these services outside of the funeral home to a different type of merchant. . . say a funeral planner. If client families believe that they are getting what they believe they need without these services at funeral homes, will not revenue drop for existing funeral homes on a per case basis?
The Federal Trade Commission (FTC) Rule: This rule which has been with funeral homes for 36 years has been scheduled for review this year and the Federal Trade Commission is in the middle of that right now. In the article I read, National Funeral Directors Association attorney, Scott Gilligan, questions if the rule has done what it set out to do, and if not, maybe the FTC will not keep it.
According to Gilligan, the FTC “were hoping the rule would incentivize consumers to get out there and price shop.” Gilligan made the comparison that in 1981 the FTC found out that about 7.2% of consumers contacted more than one funeral home and today only about 9.6% of consumers do the same. Gilligan then says, “The dynamics of the Funeral Rule really haven’t changed how consumers select funeral homes.”
And, his assessment is that “the Funeral Rule really has had no impact in holding down prices.” Also, the growth of cremation has somewhat diminished the reason for handing consumers a Casket and Outer Burial Price list if they are not even thinking about that type of service.
I’m one who believes in price disclosure. I think it is good business and letting your potential clients know what they are going to pay is very transparent. The question is, “Will it be mandated”?
From my point of view I also see price disclosure already happening in competitive markets such as the Los Angeles area cremation market. So, do we need the funeral rule if the natural laws of economics and business marketing are allowed to run their course? How will the FTC look at the funeral rule? Will it be much edited or changed. . . or, will it be done away with and let the market freely dictate what happens?
Public Company’s Use of Cash: One of the more subtle things that I’ve seen over the past five years is the public funeral home company’s raising their dividends that are paid to stockholders on an increasing basis. These funeral home and cemetery consolidators like Service Corporation International (SCI) and Carriage Services have traditionally paid lower dividends with their accumulated cash-flow then they are today.
For instance, SCI has more than doubled their dividend from $ 0.41 per share in 2015 to a proposed $ 0.84 per share in 2021. Carriage Services, in the same time had quadrupled their dividend from $ 0.10 in 2015 to $ 0.40 today. That puts the annual yield on those stocks, as of this writing, at 1.72% for SCI and 1.46% for Carriage Services. Still low, but more in line with manufacturing and good cash-flow generating companies. For instance, as of this writing, manufacturing entity Hillenbrand Industries, parent of Batesville Casket, provides a 2.5% yield.
My thought process on this is three-fold. First of all, organic revenue growth through pricing will be harder to accomplish for these companies. From 1984 until today, funeral pricing has grown at twice the rate of inflation. I don’t think that will continue to happen in this environment of lower revenue per service.
Secondly, I think the real quality acquisition targets are a battle to acquire, at a reasonable cost, as there are more large enough companies bidding on them. If acquisitions are more expensive. . . yes, they do provide increasing top-line revenue to these companies, but you will see the cost of acquisition on the bottom line. . and margins will not be as good.
So, if revenue growth slows, one of the ways to grow stock price is through increasing the dividend to the investors. I wonder if we will look back on this time and realize it was this period when funeral home acquisition companies became seen as no longer “growth” companies but as “mature” dividend paying going-concerns?
And, if cash-flow is used to pay dividends. . . .then there is less cash-flow to use for acquisitions. At the end of the day, does more dividends reduce the price that these companies can pay for growth? If so, maybe multiples on sales will go down making them more attractive to the consolidators. As you continue to talk about the “what-ifs”, it becomes somewhat of a chicken and egg dilemma. Interesting.
There you have it. . . . some random thoughts I have on what “may” be happening in the death care realm. Twenty years from now will we look back and look at this time period as a time when some substantial changes occurred in the industry or are these thoughts just minor blips on the radar screen that I have mistaken. . . .Only, time will tell.
Disclosure: The author of the article holds stock positions, in Service Corporation International, Hillenbrand Industries, and Cisco.
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