Profits from an ageing population..

We’re all getting older and this will create profitable opportunities for investors.

In the UK, for the first time, pensioners outnumber the young. This trend is set to continue for the foreseeable future as lifespans increase and birth rates fall. It is a pattern being replicated across developing countries and is set to intensify as the baby-boomer generation reaches retirement age. According to Eurostat, which collects data across the European Union’s 27 member states, there are now four people of working age (15-64) in the EU for every person aged 65 or older. By 2060 the ratio is expected to fall to two to one. Indeed this is a global trend among developed economies, including the US, and it was set to place a huge financial burden on taxpayers and governments long before the credit crunch came along.

The good news is that is provides an opportunity for investors who can find sound companies that provide goods and services catering to the needs of an aging population.

Opportunities for investors

As far as I can see, there are at least three sectors that should benefit from this trend:

• Healthcare — with a rapidly ageing population and lengthening lifespans, the demand for medical intervention and care is going to increase. There will more demand for drugs to treat diseases and procedures to cure problems to which the old are particularly prone; operations such as hip replacements.
• Personal Security (physical and financial) — an older population is going to be more concerned with issues of personal security, whether that is related to fear of crime or personal injury due to falling. They will also be greatly concerned about living in poverty due to inadequate pension provision.
• Retailers offering goods and services to senior citizens — this will include everyone from publishers of books and cruise operators to funeral directors. For example, with more old people there is obviously set to be an increase in the number of infirm and they’ll eventually die. Hence there will be an increase in provision of care homes and funerals.

Which companies are well placed to benefit?

Finding companies to invest in that can benefit from these trends obviously requires careful research if you are not to come a cropper. I’ve come across three that I think are worthy of further research and possible inclusion in a balanced portfolio.

Smith & Nephew
In the healthcare sector Smith & Nephew stands to benefit from the long-term increase in the aged population. This blue chip company has three core divisions — endoscopy, advanced wound management and orthopaedics. The bulk of its revenues ($2.8 billion) are generated from orthapaedics, which includes the manufacture of hip replacements.

Its results for the year ending 31 December 2008 showed pre-tax profits of $564m up from $469m in 2007 on revenues of $3.8 billion in 2008. It had a full-year net operating cash inflow of $566m and debts of $1.3bn, with a rolling debt facility until 2012.

Despite seeing a slight dip in first quarter revenues for 2009 it is set to make a healthy profit for the full year. Its share price currently stands at 477.5p.

Visonic
Vitronic specialises in the development of home security systems and telemedicine (such as medical alert buttons). For the year ending 31 December 2008 its revenues increased 14% to $84.9 million and its pre-tax profits were $4.6million (2007: $0.2 million). On the telemedicine side, it hopes to benefit from an increased demand for personal emergency response systems for the frail and elderly living independently at home. This is a riskier punt on an Israeli tech company and its shares currently stand at 48p.

Dignity
Funeral services group Dignity should certainly benefit from an ageing population creating plenty of new customers in the short to medium term (and, as in the long term we all have to die, it must be keeping its fingers crossed that birth rates increase). In March it posted a 17% rise in pre-tax profit to £35.4 million for the 12 months to 26 December, 2008. The only problem it seems to have is its level of borrowing: net debt is £249.3 million, which necessitated £21.6 million of finance charges in 2008 — although its cash flows are predictable and stable. More recently, it saw double-digit increases in both sales and operating profits in the first three months of 2009. Sales in the three months to 27 March rose by 12.8% to £52.9m, while operating profits rose by 15.3% to £20.4m. Its shares are currently 579p.