Service Corporation International (SCI) - Buy the Durable Demand; Ride Pricing and Dividend Tailwinds

Hook - thesis

Service Corporation International (SCI) is a business few investors think about every day, but one they should. The company runs funeral and cemetery operations across the U.S. and Canada - a service set that is hard to disrupt, benefits from local scale and pricing, and produces steady cash flow. Management is showing discipline: recent quarters delivered robust operating cash flow while dividend and buyback programs have been expanded.

My trade thesis is straightforward: buy SCI on weakness for a 6-12 month position. The business shows visible demand, demonstrable pricing power in both funeral and cemetery segments, and a reliable cash-flow conversion profile that supports dividend growth and buybacks. Those are structural positives that, in my view, justify owning the stock at the right levels even though the company carries meaningful leverage.

Business overview - what they do and why the market should care

SCI provides funeral and cemetery services and related products across the U.S. and Canada. The bulk of revenue comes from funeral services where professional services, facilities and merchandise create recurring transactional revenue streams; cemetery operations add higher-margin real estate-like sales and memorial products. The model matters because demand is inelastic (death rates move slowly with demographics), pricing is local and defensible, and many customers buy pre-need or funded plans that smooth revenue and convert to cash with predictable timing.

Why should investors care? Three reasons:

• Visibility of demand. Volume and revenue in personal-services businesses are far less cyclical than discretionary retail. This underpins predictability for cash flow.
• Pricing power and product mix. Cemetery property and memorialization products carry higher margins and provide an avenue to expand gross profit even as funeral volumes ebb and flow.
• Capital returns. Management is returning cash to shareholders through a rising quarterly dividend and expanded repurchase authorization, which supports total-return upside independent of share-price multiple expansion.

What the numbers show (selected datapoints)

Use the recent quarterly results to see the dynamics:

• Q3 FY2025 (period ended 09/30/2025) revenues: $1,058,096,000.
• Q3 FY2025 operating income: $226,391,000; gross profit: $265,543,000.
• Q3 FY2025 net income attributable to parent: $117,473,000; diluted EPS: $0.83.
• Operating cash flow remains robust: Q1 FY2025 $311,147,000; Q2 FY2025 $166,433,000; Q3 FY2025 $252,280,000. The business generates large, repeatable cash flows every quarter.
• Balance sheet snapshot (Q3 FY2025): assets $18,361,776,000; liabilities $16,794,492,000; equity $1,567,284,000; long-term debt ~$5,029,639,000. That implies a leveraged capital structure - more on that in risks.
• Dividend and capital return: the company declared a quarterly cash dividend of $0.34 on 11/05/2025 (payable 12/31/2025), up from $0.32 earlier in 2025 and ~ $0.30 in 2024. Management also increased share repurchase authorization on 05/06/2025.

Key takeaways from the figures: SCI converts revenue into operating cash reliably (quarterly operating cash flow in the hundreds of millions). That supports a rising dividend and buybacks even while the firm maintains meaningful leverage. Revenues and operating margins are stable, and the cemetery business provides higher-margin revenue that helps expand gross profit.

Valuation framing

Current market price is trading around $82.02 per the latest snapshot (most recent trade ~ $82.05). The dataset does not supply a market capitalization directly; however, we can approximate valuation by annualizing recent net income. Summing the last three reported quarterly net incomes attributable to parent (Q1 FY2025 $142.88M, Q2 FY2025 $122.865M, Q3 FY2025 $117.473M) gives ~ $383.22M. Annualizing that three-quarter total (a conservative proxy in the absence of the fourth quarter data) gives an approximate net income run-rate near $511M. Using the latest diluted average shares (Q3 FY2025 diluted average shares: ~141,424,000), that implies an approximate annualized EPS of roughly $3.60 - $3.70, which yields an indicative P/E in the mid-20s at the current price. This is an approximation and should be treated as such because a full trailing-12-month set of consolidated quarters was not available in the dataset.

Qualitatively, SCI looks reasonably valued for a cash-flowing, dividend-paying, defensive personal-services business with organic pricing tailwinds. The mid-20s P/E (approximate) is not cheap, but the combination of payout growth and buybacks reduces valuation risk - you are buying a cash-yielding business with modest growth and good cash conversion.

Trade idea (actionable)

Setup: accumulate SCI on weakness for a medium-term position (6-12 months). The business is not a high-beta trade; treat it as an income-oriented position with upside optionality from multiple expansion or accelerating buybacks.

• Trade direction: Long.
• Entry: Buy on weakness between $76.00 - $80.00. If you already own, consider adding below $78.00. The stock has traded in a broad 12-month range roughly between $75 and $85; buying nearer the low end improves reward-to-risk.
• Initial stop: $71.50 (about 7-8% below the $78 mid-buy zone). A break below $71.50 would suggest the recent support range has failed and would invalidate the conservative risk profile of this trade.
• Primary target (near-term): $95.00 (roughly +16-22% from current prices) - achievable via multiple expansion, continued dividend/buyback support, or stronger-than-expected cemetery sales.
• Extended target (bull case): $105.00 (approx +28%+) if the company accelerates buybacks, delivers better-than-expected margin expansion, or the market re-rates defensive cash-flow names.
• Position sizing: Limit any single trade to an allocation consistent with your risk tolerance (e.g., 2-5% of portfolio size for a typical retail investor). SCI carries leverage so avoid oversized bets.
• Time horizon: 6-12 months (position trade); reassess at each quarterly release or after major macro moves in rates or credit spreads.

Catalysts to watch

• Quarterly results showing stable to improving operating cash flow and margin expansion driven by cemetery product mix.
• Continued dividend increases or accelerated share repurchases - management has already increased repurchase authorization (05/06/2025) and raised the quarterly dividend on 11/05/2025 to $0.34.
• Seasonal or local markets strength in the cemetery segment that boosts gross profit above expectations.
• Any M&A activity that meaningfully increases market share or adds accretive cemetery locations.

Risks and counterarguments

There are several legitimate risks to owning SCI, and they are the main reasons I recommend a defined stop and measured position size:

• High leverage. Long-term debt stands near $5.03B (Q3 FY2025) while equity is about $1.57B. That is a leveraged balance sheet that raises vulnerability to higher interest rates or a sharp earnings shock. Interest expense is meaningful - ~ $65.7M reported in Q3 FY2025 - and sustained rate increases or credit-market dislocation would increase financing pressure.
• Macroeconomic pressure on pre-need sales. While death rates are steady, customers’ willingness to prepay or purchase higher-end merchandise can be rate- and confidence-sensitive. A recession or pullback in discretionary pre-need upsells could pressure revenue and gross profit.
• Regulatory and litigation risk. Funeral and cemetery businesses face regulatory oversight and occasional litigation; adverse outcomes could be costly or damage reputation.
• Execution risk on capital allocation. Management is boosting buybacks and dividends. If the company overleverages to fund M&A or repurchases, it could impair flexibility. Conversely, if buybacks are cut, the valuation support would diminish.
• Valuation sensitivity. If investors re-rate defensive, dividend-paying names lower (e.g., due to higher discount rates), SCI shares could fall even with stable cash flow.

Counterargument (what the skeptics will say)

Critics will point to the debt load and say SCI is risky when rates rise or if mortality patterns soften. They will also note the stock is not dirt-cheap on a P/E basis (approx mid-20s based on recent quarter annualization), and argue capital should be used to de-lever rather than buybacks. These are fair points: leverage reduces optionality, and a valuation that priced in an ideal outcome could compress if any execution problem appears.

What would change my mind

I would sell or materially reduce exposure if any of the following occurs:

• Operating cash flow deteriorates meaningfully quarter-over-quarter (e.g., a sustained drop below ~$150M per quarter), which would indicate weaker demand or margin pressure.
• Management significantly increases leverage (material new debt) to fund buybacks or acquisitions without a clear, accretive return plan.
• Regulatory rulings or litigation that create sizeable cash liabilities or materially degrade the company's local market positions.
• Shares sustainably break below the stop level ($71.50) on high volume, which indicates structural market re-rating and warrants re-assessment.

Conclusion and final stance

SCI is a business with stubbornly dependable demand, improving capital returns and the kind of local, hard-to-replicate asset base that creates a moat in personal services. The numbers back this up: consistent quarterly revenues around $1.05B, operating income north of $220M, and quarterly operating cash flow repeatedly in the low- to mid-hundreds of millions. Management is using cash flow to increase the dividend (latest declared 11/05/2025 - $0.34) and to accelerate buybacks, which should support share-price appreciation even absent rapid earnings growth.

Action: accumulate on weakness between $76 - $80, stop at $71.50, target $95 (primary) and $105 (extended). Risk level: medium - the business is resilient but balance-sheet leverage and rate sensitivity demand respect. I rate this a tactical long for a 6-12 month horizon; size positions conservatively and re-evaluate after quarterly results or any material shift in leverage or capital-return policy.

Disclosure: This is a trade idea, not personalized financial advice. Investors should consider their risk tolerance and do their own due diligence before trading.