Shares in Medibank Private Ltd (ASX: MPL) fell to $2.15 on Thursday afternoon, only 2% from its lowest level for the year and just 4% above the all-time low of $2.08 hit shortly after listing in 2014.
To make matters worse, Medibank's shares have underperformed the market by nearly 17% in 2015! Medibank's shares have plunged 10.8%, while the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) is up 5.6%.
What's Happened?
One may be tempted to conclude that the fall is to do with some negative sentiment over the health insurance sector, however this doesn't appear to be the case, with close rival NIB Holdings Limited (ASX: NHF) up 20% in this calendar year alone!
I think there are three reasons why investors have started to question the Medibank investment theory:
- It's going to be harder for Medibank to grow in the future. The cost of private health cover is becoming prohibitively expensive for the average consumer. Health insurance premium inflation has rocketed ahead of general inflation over the last 10 years, with the average premium for comprehensive cover well over $1,000 per year per person. New, low-cost entrants are also stealing market share from Australia's largest insurer.
- It's not the dividend feast many had expected. Medibank's first year yield of around 4% is equalled or beaten by other large companies with decent growth prospects like Telstra Corporation Ltd (ASX: TLS), QBE Insurance Group Ltd (ASX: QBE), Suncorp Group Ltd (ASX: SUN) and Commonwealth Bank of Australia (ASX: CBA).
- Key personnel don't appear to be performing. Some analysts have picked up on the fact that there has been a significant management reshuffle. The IPO prospectus declared that the company would have 'a highly experienced board and management team with significant business and industry experience'. The Chief Customer Officer has left after disappointing customer growth (or lack of) with other changes in the works.
The poor performance of Medibank raises questions for the outlook of the stock over the next 12 months. Unless the group's management can grow margins in this half, I expect we will see the share price fall so that it more closely aligns with low-growth, moderate income stocks.
Medibank needs to find a way to either significantly boost its dividend or significantly boost its growth prospects so that investors can decide what they're investing in.
