Recently I've stated several times that Medibank Private Ltd (ASX: MPL) was not a buy at its recent highs of $3.20 per share. There were several reasons, including strong competition, a high price, dwindling levels of individual healthcare coverage, and average business performance that led to a loss of market share. However, these concerns by themselves aren't necessarily a reason to sell Medibank Private.
Here's why the company continues to be a good long-term hold in your portfolio:
- Government-legislated increases in premiums per annum, resulting in growing revenues if the company can maintain market share
- Defensive market segment – it's in the government's interests to encourage people to take up private health insurance, and it's often a good deal for individuals also
- 3.6% fully-franked dividend, and a small but growing investment portfolio
Warren Buffett showed that insurers' can build impressive investment portfolios and indeed Insurance Australia Group Ltd (ASX: IAG) and QBE Insurance Group Ltd (ASX: QBE) have billions of dollars in stocks and bonds that contribute significantly to profit. Unfortunately, Australian insurers haven't been anywhere near as good as investing as Buffett's Berkshire Hathaway, but Medibank can still build its own 'float' which will contribute to profits. Higher interest rates in the long run could also be a small tailwind.
Investors should be prepared for a bumpy ride though, as insurers traditionally have 'lumpy' profits because the claims they receive can't be reliably forecast in advance. Additionally, I'd say the healthcare system is ripe for a few government changes, but they're unlikely to have a serious impact on the health insurance business, because this is one of the government's mechanisms for reducing the burden of the public health system.
Trading at over 20x earnings, I wouldn't feel comfortable buying the business at today's prices. Yet with all the 'Brexit' noise, investors may well be able to pick it up significantly cheaper in coming weeks if market confidence tumbles. Either way, the company continues to look like a solid 'Hold' for the existing shareholders out there.
