Service Corporation International: An Under The Radar Wealth Generator

Summary

Service Corporation is a Dividend Contender with 11 consecutive years of dividend growth. Shares currently yield 1.58%.

Service Corporation is the largest owner and operator of funeral homes in the world.

Service Corporation generates ample cash flow which they return to shareholders via rising dividends and share repurchases.

_jure/iStock via Getty Images For the core of my portfolio I want to focus on businesses that are stable and predictable. One business that doesn’t get much attention is Service Corporation International (NYSE: SCI ).

Service Corporation is the largest funeral home operator in the world. Service Corporation has 1,471 funeral homes and 488 cemeteries across 44 states domestically as well as 8 Canadian provinces. Dividend History

Dividend growth investing is a straight-forward investment philosophy that focuses on the dividends that a business will be able to pay out to shareholders. Intuitively it makes sense as it helps to narrow down the investment candidates to ones that are likely high quality if they have a lengthy history of dividend growth. Service Corporation Dividend History (Service Corporation Investor Relations) Service Corporation has increased their annual dividend payment for 11 consecutive years which gives them the title of Dividend Contender. Service Corporation’s dividend growth got off to an inauspicious start by stalling just 2 years into its journey during the Great Financial Crisis. However dividend growth resumed in 2011 with several years showing multiple raises.

Dating back to 2007 Service Corporation’s year over year dividend growth has ranged from 0.0% to 33.3% with an average of 15.6% and a median of 15.8%.

Over that same period there’s been 11 rolling 5-year periods with annualized dividend growth ranging from 11.0% to 22.4% with an average of 16.1% and a median of 16.2%.

During that same timeframe there’s been 6 rolling 10-year periods with annualized dividend growth ranging from 15.6% to 17.2% with an average and median of 16.5%.

Back in February Service Corporation announced a raise to $0.25 from $0.23 which was an excellent 8.7% increase over the prior payment and a 19.0% increase for the same payment in 2021.

The rolling 1-, 3-, 5- and 10-year dividend growth rates since 2007 for Service Corporation can be found in the following table. Year Annual Dividend 1 Year 3 Year 5 Year 10 Year 2007 $0.120 2008 $0.160 33.33% 2009 $0.160 0.00% 2010 $0.160 0.00% 10.06% 2011 $0.190 18.75% 5.90% 2012 $0.220 15.79% 11.20% 12.89% 2013 $0.270 22.73% 19.06% 11.03% 2014 $0.340 25.93% 21.41% 16.27% 2015 $0.440 29.41% 25.99% 22.42% 2016 $0.510 15.91% 23.61% 21.83% 2017 $0.580 13.73% 19.49% 21.40% 17.06% 2018 $0.680 17.24% 15.62% 20.29% 15.57% 2019 $0.720 5.88% 12.18% 16.19% 16.23% 2020 $0.780 8.33% 10.38% 12.13% 17.16% 2021 $0.880 12.82% 8.97% 11.53% 16.57% 2022* $1.000 13.64% 11.57% 11.51% 16.35% *Assumes 2 additional payments at $0.25 per share.

Source: Author; Data Source: Service Corporation International Investor Relations

The dividend payout ratio gives a quick glimpse into the safety of the dividend, and the potential for it to continue to be raised in the future, by comparing the annual payout versus either profits or cash flow. All else being equal I prefer to see a lower payout ratio as that gives more room for the inevitable fluctuations in the business without jeopardizing the dividend. SCI Dividend Payout Ratios (Service Corporation SEC filings) Despite the rapid growth in the dividend over time, Service Corporation’s payout ratios has remained quite conservative. The 10-year average net income payout ratio is 34% with the 5-year average at 26%. Meanwhile the average free cash flow payout ratios are 30% and 31%, respectively. Quantitative Quality

When employing a dividend growth strategy the focus is centered around the dividend; however, the fundamentals of the business are what will fuel dividend growth over time. In the process of determining whether the business is one I can be confident will still be around and paying out higher dividends in the future, I want to examine how the business has performed across a variety of financial metrics over time. SCI Revenue Profits and Cash Flow (Service Corporation SEC filings) For a rather mundane industry, Service Corporation has shown solid revenue growth through both rising prices, upselling services, and acquisitions. Over the last decade revenues increased 71.9% or 6.2% annualized. Gross profits improved an impressive 149.3% or 10.7% annualized over that time as well.

Operating profits rose 190.8% or 12.6% annualized with operating cash flow increasing 149.3% or 10.7% annualized. Similarly, Service Corporation’s free cash flow improved by 143.0% or 10.4% annualized.

The following chart shows the rolling 5-year CAGRs for Service […]

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