Dignity shares are up 20% in 1 week. Should I buy?

Last week, Dignity (LSE: DTY) shares were up 20%. The stock has now risen by 24% in 2021 so far and has increased by over 190% in the past 12 months.

So why did Dignity shares rally? Well, the company released a trading and strategy update on Wednesday. And the market was impressed. So much so that the stock has been rising ever since.

The shares trade on a price-to-earnings (P/E) multiple of 16x, which I don’t think is really expensive. But for now, I’ll only be watching the stock. And I think it’s worth me taking a closer look at the announcement.

Trading update

I’m not surprised that the number of deaths in the first quarter of 2021 increased by 27% to 204,000. This was a horrendous time when a lot of people were dying from Covid-19. Since then, the number of UK deaths has fallen “below the five-year average (2015-2019) for April and May 2021 resulting in deaths now being 7% lower”.

Dignity’s funeral market share was a lower-than-usual 11.5% in Q1 2021. The firm put this down to the general “delay in the date of death being registered and the funeral being performed”. But this has now started to “normalise” and from May 2021, its funeral market share has crept back up to 12%.

Average revenue per funeral in April and May has improved from the first three months of the year. But underlying profit for the 21-week period ending 21 May amounted to £30.7m, which was “slightly behind the prior year”.

New strategy

In my opinion, this isn’t the main reason why Dignity shares rallied last week. The funeral services provider released details of its new strategy.

Executive Chairman, Gary Channon believes “in the vital role Dignity plays in society and within the wider funeral sector itself”. And I agree with this statement, especially with what has happened in the past 18 months.

But the company’s previous strategy wasn’t working. It was focusing on increasing prices, which meant that it was losing volume of business and competitiveness. This led to a steady decline in performance and funeral market share.

So what’s different now? Well, it’s now going to prioritise selling funeral plans through its branches rather than telephony partners. It has cancelled five telephony contracts that Dignity identified as “uneconomical”. 

Of course, this is going to have an impact. This includes 35% revenue loss for the funeral plan division for 2021. But there’s a bright side. This will be offset by the £12m in savings in the year from telephony commission costs.

My view

It’s great that the company now has a plan. But it’s one thing saying so and another delivering results. I also have some concerns.

As my fellow Fool Royston Wild has highlighted, the Competition and Markets Authority (CMA) conducted a review last year and is looking to lower the cost of funerals in the UK. This could hit revenue and the share price. Even the board is concerned about this and the company is commissioning an annual report on the cost of dying.

At present, I think the risks outweigh the potential rewards. So for now, I’ll keep Dignity shares on my watch list.