Are there any undervalued income opportunities left?

We thought the market correction would have driven up the yield on many investments that fit our criteria. But prices are still high given investors’ flight to safety.  However, when we started to focus on fundamental, eternal drivers of growth, we did find one long-term investment we like, and we’re adding it to our Aggressive Portfolio. 

One of the core areas that we have recommended for the long-term is health care.

Not to be macabre, but all these new drugs and treatments will reduce pain and prolong life, the sad truth is that death will always be the final result. And that inevitability offers a solid, long-term investment trend beyond healthcare.  

According to the AARP Public Policy Institute, the $20 billion death care industry, which performs nearly two million funerals and burials per year, has been consolidating. And as the big players grow bigger, more can pay higher and steadier dividends.

And according to the National Center for Health Statistics, the death rate is is expected to rise at a rate of 1% annually.

Even as the number of deaths may be increasing, so is the cost of a funeral. By some estimates the cost has risen 1,328% in four decades so that today the average price tag is $8,000 to $10,000.  This has made traditional funerals less popular.

However, there are death care services companies that have been able to consolidate and cut costs while selling cheaper services such as cremation services (42% of people are cremated) to offset the slowing in traditional funeral services.

We believe the consolidation that has occurred already allows some firms to be market leaders in certain segments, such as in the making of funeral products, which is still lucrative.  

In the subscriber section, we profile on the world’s biggest casket makers whose time has come.

Portfolio Update

Though it is a difficult environment for finding undervalued opportunities – particularly given the correction and slowdown in global economies – we strongly believe focusing on fundamental value will always carry the day.

Hillenbrand (NYSE: HI) fits the Global Income Edge investment thesis like a glove as a company that is dominant in its U.S. domestic market but offers growth opportunities from international markets. 

The company is the dominant casket and funeral services provider in the U.S, under the 100-year old Batesville brand. It has also has bought various process equipment companies, including TerraSource Global, Rotex, and Coperion, which gives the firm addition revenues and diversification. These reside in Hillenbrand’s  Process Equipment Group, and its major customers include Exxon, Kimberley-Clark, Dow Chemical, Nestle, M&M and Uralkali. 

The Process Equipment Group designs, sells, installs, and supports industrial equipment globally. Its products serve a wide range of industries, including packaged foods, pharmaceuticals, plastics, energy, minerals, fertilizers, and petrochemicals. The group also has sizable recurring revenue from the sale and service of consumable parts that provide strong opportunities for additional growth.

The trends driving the Process Equipment Group business, which is 2/3 of Hillenbrand revenue, is growing population, rapidly expanding middle class and rising demand for food and energy. Presently the global plastics market is its largest, followed by agriculture. 

Even as a strengthening dollar has hurt its overseas businesses and manufacturing has slowed in parts of the world, the company has grown revenues by 2% at its funeral business and 4% at its process equipment business.

We believe Hillenbrand has been shrewd in developing a process equipment business that’s well diversified across sectors and geography in emerging markets, and in Asia and Europe, where growth will eventually rebound.

Further, with its exposure to the world’s manufacturing industries, the firm could become the largest funeral services firm in the world.  The firm has astutely diversified into cremation services, which is increasingly chosen as a cheaper option. And the company has a track record of performance as an industry leader in volume, revenue and margins.    

Further, this business seems to offer more diversification and seems better managed than competitors Service Corp International (NYSE: SCI) and Stonmor Partners (NYSE: STON).  

The death care industry is still consolidating and the largest firms are still only small- to mid-capitalization stocks.

But using our Dupont hybrid model, we have been able to determine HI has consistently delivered a return on equity in the 3% to 5% range since 2012.

With a dividend yield of 3.14%, HI is a Buy up to $38 in our Aggressive Portfolio.