Every business – and every investor – is looking for the holy grail of a good, reliable, predictable revenue stream, that does not rely on the ups and downs of economic growth.

InvoCare Limited (IVC) has one: death.

IVC is Australia’s largest funeral chain operator, with about 26% market share of the $960 million funeral market, and 17% of the cemeteries and crematoriums market.

A basic funeral costs between $6,000 and $8,000, depending on which state you live in and whether it is a cremation or a burial. About 147,000 Australians die each year: this number has been increasing over the last decade, in line with the ageing of the Australian population. At the moment, there is a large population ‘cohort’ moving into the twilight – in other words, more people are reaching an age at which death is more likely.

That is InvoCare’s market.

Big business

IVC operates under the brand names of White Lady and Simplicity (the only two national funeral chains) as well as a suite of regional brands including Guardian Funerals, George Hartnett Funerals, Le Pine Funeral Services, Purslowe Funerals and Blackwell Funerals. The company has more than 150 business locations: the branded businesses all use the combined ‘back-office’ support function.

In June 2011, it bought Bledisloe Funerals – not a reference to the Wallabies’ record against the All Blacks, but New Zealand’s largest funeral business. Given that Bledisloe was also number two in the Australian market, owning 14 funeral operators, two crematoriums and a cemetery spread across Queensland, New South Wales, Victoria and Tasmania, the Australian Competition & Consumer Commission (ACCC) looked long and hard at the deal before approving it.

The Bledisloe acquisition launched IVC into New Zealand, Tasmania and regional parts of Queensland. Outside Australia, IVC has operated in Singapore since 2003: it has two brands in that market, Singapore Casket and Simplicity Casket.

IVC was floated by Macquarie in 2003, after the investment bank acquired the business sold by US-based Service Corporation International. Macquarie sold the stock at $1.85 a share: the shares moved smoothly to $7 until the GFC hit, after which IVC slumped to under $5 before resuming its remarkably consistent uptrend. The shares currently trade at $9.74, a record high.

Investors have received a total return of 21% a year over the last three years; 11.5% a year over five years.

Clearly, the stock market loves IVC.

The 2003 prospectus projected $144 million in revenue and a fully franked dividend of 12.8 cents; by 2011 (IVC uses the calendar year as its financial year), revenue was $327.5 million and the dividend was 29.8 cents a share. Operating earnings have increased every year.

Four sources of revenue growth

InvoCare has four sources of revenue growth. First, there is the death rate. The company says that has contributed about one percentage point a year of growth over the last 20 years – but as the population ages, the death rate is expected on its own to contribute 2.7 percentage points a year.

The second source is annual price increases. This is a delicate matter, but InvoCare’s businesses are not charities, and their input costs increase all the time. The company spends a lot of money on the design, construction and maintenance of its Memorial Parks and Gardens – which used to be called cemeteries and crematoriums – and is highly innovative in providing tailored services and memorial areas that reflect Australia’s multi-cultural makeup.

InvoCare says it has been able to get annual price increases of between 3% –4% a year, because it works hard to create and maintain premium brands and the service expectation that comes with that. In this regard, the funeral business is like any other business: arguably, it may even be easier in this business to create the customer rapport that characterises a premium experience, given the highly sensitive and emotional nature of the service offered.

Thirdly, there is acquisition. In its life on the stock exchange, InvoCare has certainly been a willing buyer of businesses, but for now, the company is concentrating on fully bedding down the Bledisloe acquisition and extracting efficiencies from those businesses.

The fourth revenue source is the investment activity, in which InvoCare invests pre-paid funeral plan payments. These funds are invested conservatively – although with a bias to Australian shares – so revenue growth is not really to be expected from this quarter.

Is it a buy?

So, should you buy it?

IVC has a lot of the characteristics of a utility stock, with high gearing (about 250%), predictable earnings, comfortable interest cover and a relatively high yield. But it has also shown a strong track record of generating earnings growth, and a rising dividend. Fund managers like it, for good reason, as it is a very high-quality stock.

But in a concentrated share market like Australia’s, that makes a stock like IVC a crowded trade. It is getting very expensive, at about 21 times expected FY13 earnings and a prospective fully franked dividend yield of 3.8% – 4.1%

For SMSF investors, the expensive price/earnings (P/E) ratio should be balanced against the relatively high yield and the defensive exposure to the growing business of death. Even at $9.74, IVC is offering a prospective FY13 yield to an SMSF in accumulation mode of 4.6% – 5%; and to an SMSF in the pension-paying phase, and untaxed, the full refund of the franking credits takes that to 5.4% –5.9%.

You can do better than that in terms of fully franked yields from Australian shares. But the unique exposure that IVC gives you more than makes up for that. There are only two certainties in this world: the ‘taxes’ bit you have covered by the franking credits working to augment your yield – IVC allows you to profit from the other certainty.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.