The healthcare sector has been one of the best performers over the last few years. Most businesses in the healthcare sector can be considered defensive, yet they're also growth stocks thanks to the growing expenditure by people wanting to stay healthy.
The unstoppable aging of the Australian population will also boost the healthcare sector, it's a sad fact of life that the older we get the less invincible we become.
The government is going to find it increasingly difficult to fund the public healthcare system, so one way or another more patients will head through the private sector system.
Here are three companies that I think will make good long-term investments in the private healthcare sector:
Sonic Healthcare Limited (ASX: SHL)
Sonic is one of the largest healthcare stocks on the ASX with a market capitalisation of $9.14 billion, during FY16 it grew total revenue by 20% to $5.1 billion. Sonic's healthcare business revolves around imaging, pathology and clinical solutions.
One of the main reasons why I like Sonic more than Primary Health Care Limited (ASX: PRY) is that over half of Sonic's revenue comes from overseas countries like New Zealand, the USA and several European countries. This creates good diversification and means it doesn't rely too heavily on one country for earnings.
Sonic Healthcare is trading with a price/earnings ratio of 20.2 and has a partially franked dividend yield of 3.4%. Sonic has increased or maintained its dividend every year since 1994, which has provided good certainty for shareholders.
Ramsay Health Care Limited (ASX: RHC)
Once a patient has received a diagnosis from Sonic, they may need to visit a Ramsay hospital for treatment.
Ramsay is the largest operator of private hospitals in Australia with a market capitalisation of $14.4 billion. It has managed exceptional growth of revenue, profits and dividends since it listed. In the last five years it's delivered a total shareholder return of 118.5%.
Ramsay has large hospital networks not only in Australia but also in other countries like the UK, France and a few South East Asian countries. It has ambitions to expand into China, which could be a large growth runway for Ramsay.
Ramsay is trading with a price/earnings ratio of 30.7 and a grossed up dividend yield of 2.39%.
NIB Holdings Limited (ASX: NHF)
NIB is a private health insurer which aims to help patients afford the trip to hospitals like Ramsay. With a market capitalisation of $2.1 billion, NIB is smaller than Medibank Private Ltd (ASX: MPL), but I think that just means it has more room to grow.
NIB recently managed to grow its number of policy holders by 9.2% to 726,710. This is impressive because Medibank said the total number of private health insurance holders was down in FY16.
Private health insurance companies are a good way to get investment exposure to all the different health issues rather than just one like Cochlear Limited (ASX: COH).
NIB is trading with a price/earnings ratio of 22.8, with a grossed up dividend yield of 3.41%.
Foolish takeaway
I think the healthcare sector is one of the best sectors to be invested in as it has defensive qualities yet is also likely to grow well too. National expenditure on health will continue to rise, whether it comes from the government, private health insurers or is patient funded.
The above three businesses all have their part to play in the health system and could continue growing for a long time to come.
