I learned long ago that there is no such thing as a free lunch and there is no such thing as a safe investment.  However, sometimes you can get pretty close to a free lunch (all you gave is time) as an attendee at a post-funeral lunch and pretty close with Treasury Bills backed by the full faith and credit of the United States government as well as certain savings accounts under $250,000 that fall under the Federal Deposit Insurance Corporation (FDIC) guarantee.

However, with most everything else it’s “Caveat Emptor” or “let the buyer beware”.

It’s with that preface that I tell you of an investment in debt held by the largest funeral home and cemetery operator in North America, Service Corporation International (SCI), that will mature in 2032.  That investment, what SCI calls their “Senior Notes Due 2032” pays a listed 5.75% interest payment on increments of a $1,000 bond that is currently (January 6, 2024) selling below par at $974.4 per $1,000 unit resulting in an effective yield of 5.9%.

SCI put these bonds on the market back in September 2024 and you can read about them here from a press release that SCI issued at that time.

Tom Anderson
Funeral Director Daily

Funeral Director Daily:  I bring this up today not to try and sell bonds for Service Corporation International, but rather as a way to look at the overall creditworthiness of the Death Care industry and profession.  Those bonds have been given a credit rating of “BB” by Standard & Poor’s rating services.

What I find interesting is that there are very few people in our profession who don’t think that SCI will be a going and viable enterprise seven years from now when that bond principal becomes due to be paid back to those that invested in those bonds.  Yet, they are rated “BB” by Standard & Poor’s. . . In my opinion that shows how difficult it is to be rated in the “A and above categories”.

When you look at SCI, according to E-Trade financial website, the company did $4.1 billion in business in 2023 and that amount produced a “Net Income” of $537 million.  If you do the math on those numbers that equates to 13 cents out of every dollar spent with SCI as moving down to the “Net Income” line. . . . Yet, the credit companies, and I agree there is a lot that goes into that rating, don’t give them an “A” rating.

Again, I just think that this points out how difficult it is to recieve and secure an “A and above” rating from the corporate credit agencies.

Here is an article from Standard and Poor’s dated September 12, 2024 titled “Service Corporation International’s $800 million Senior Unsecured Notes Rated “BB”

Investments are a decision of “Options and Risks” —  On the same day (January 6, 2024) that I looked at the par value of the SCI bonds I also looked at E-Trade’s listing of 5-year Certificates of Deposits (CD’s) which, when purchased in a unit of under $250,000 have the FDIC insurance benefit to individual investors.  The top interest rate that I found was 4.7% from JP Morgan Chase for a CD that matured on January 16, 2030.

So, a purchaser has the option of choosing that 4.7% rate in a virtually guaranteed investment as compared to the 5.9% rate from the SCI bond which has some level of risk.  What would be your choice?

My time in Debt Management —  When I served on the Board of Regents for the University of Minnesota I chaired what was called the Debt Management Committee for 4 years.  It’s where all the debt for the University was watched and our committee made suggestions to the full Board of Regents about potential uses of credit.

The committee was ad hoc and I was blessed to have financial and revenue experts from two large urban counties, the CFO of the University of Minnesota, the Dean of the University’s Carlson School of Business, and a retired CFO from a Fortune 100 company on this ad hoc board to advise me during this time.  I learned an extreme amount of information and details about the public credit markets from this position and, at least in my opinion, we were able to selectively and judiciously use the University’s S&P Credit Rating of “AA” to our advantage in building University assets for the future.

Disclosure — This article from Funeral Director Daily is not intended as an investment advice article.  It is meant to be an article on how the ratings companies may look at the Death Care, funeral, cemetery, and related businesses in the overall scheme of creditworthiness.

Disclosure — The author of this article from Funeral Director Daily is a shareholder in Service Corporation International (SCI).

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Park Lawn Corporation (PLC), a publicly-held funeral home and cemetery operator reported their 2023 4th Quarter and 2023 Full-Year financial results last week.  In those results, which you can see here, the company reported revenues for both the 4th Quarter and Full-Year of 2023 increasing from the comparable quarter and year.  They did, however, report a Net Loss for both both time periods, explained by the completion of the sale of 83 properties to Everstory Partners which happened in December 2023.

You can read a Funeral Director Daily story about that event here.

In a prepared statement in the Park Lawn Corporation press release PLC Chief Executive Officer J. Bradley Green explained that Net Loss this way:

• “Net (Loss) Earnings for the quarter and year ended 2023 reflect a loss as a result of the disposition of certain legacy businesses completed in December.  However, Adjusted Net Earnings for the three-month period ended December 31, 2023 increased by approximately 5.3% while decreasing by 10.1% over the comparable prior year, principally as a result of the normalization of the death rate. “

A positive attribute of that Everstory transaction was also explained by CEO Green in this manner:

• “At closing, Park Lawn received $70M consisting of $55M in cash and the remaining in deferred compensation, bearing interest at 10% per annum, to be received by PLC within 5 years following the close of the transaction.  The cash proceeds were used to pay down debt resulting in a reduction of Park Lawn’s leverage ratio to  1.95x and 2.75x, including Park Lawn’s outstanding debentures.”

CEO Green also commented on what the divestiture of those 83 properties would do the the company’s previously disclosed aspirational plans:

• “Given the recent completion of the transformational disposition of certain legacy businesses at the end of December, as well as the current macroeconomic environment, we no longer believe that our previously announced five-year long-term aspirational financial targets are achievable by the conclusion of 2026. . . Rather than long-term targets, in an effort to enhance the insight and disclosure around our operating performance, we believe annual guidance will provide improved near-term transparency of our financial expectations and strategic direction to our investors, shareholders and stakeholders.”

Tom Anderson
Funeral Director Daily

Funeral Director Daily take:  Now that we have seen the Full-Year reports for the “Big 3” public funeral home and cemetery operators it is interesting to try to decipher their individual ambitions and plans for moving forward.  It appears to me that the last couple of years have been about “Right-sizing” the ships following what was learned in the pandemic.  I think each of those companies — Park Lawn, Carriage Services, and Service Corporation International — have plans on where they hope to bring their companies and each has a definite path that they want to follow to continue to build out the operations.

Once the Service Corporation International moratorium on selected acquisitions (see Funeral Director Daily article here) is lifted, I think we will get a pretty good idea of where those destinations are.

In the meantime, here’s a little chart I put together on the Revenue increases for each of those companies for the 2023 4th Quarter and the 2023 Full-Year.  The percentage listed is the company’s revenue over the same periods in 2022:

And here is the total revenues as reported by each of the companies for the Full-Year 2023.  You can see, in round numbers, the extreme size of SCI as they continue to have annual revenue of more than 10 times the other companies.

2023 Reported Annual Revenue

• Service Corporation International                  $ 4.09 billion
• Carriage Services                                               $  382.5 million
• Park Lawn Corporation                                    $  347.6 million

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