At $2.83 per share, Medibank Private Ltd (ASX: MPL) shares are up some 40% in the two-and-a-half years since their debut. Paying a 4% fully franked dividend, they're also starting to look appealing to dividend investors.
I'm not a buyer of the company today – I'll get that out up front. It's been losing market share to competitors and reportedly has woeful customer service, although it is working on these issues. There are plenty of positives about the business however, and here are three reasons it's on my dividend watchlist:
- Regulated industry with annual increases in premiums
This is a two-edged sword, as the regular increases in premiums are placing financial pressure on customers. However, costs in the healthcare industry are rising and customer use of health services is also growing rapidly.
Government regulation allows the insurers an annual premium increase to cover the increasing cost of services, which helps mitigate margin pressure that would occur if premiums stayed flat and costs increased. It also means that most of the industry is growing its premiums at a similar rate, helping to ease competition on cost.
- A strong balance sheet and short-tail liabilities
With no debt and 48 cents per share in 'net tangible assets', which are mostly investments, Medibank is in a good position to weather any impacts, such as if claim expenses ballooned in one year. It also has 'short-tail' liabilities, mostly 1 year in length (the length of the insurance policy), which means that shareholders won't get clobbered in 5 years' time by bad policies that the company could theoretically be writing now.
Basically, Medibank has a strong financial position and less hidden risks in its insurance policies than some other insurers.
- A reliable business
Bottom line, ~$1,500 a year is a bargain compared to what you would have to pay if you had a serious illness and no insurance – rising costs of insurance or not. When you combine this with government support for the private health industry (attempting to migrate clients from the public to private health system) there is in my opinion a steady pool of customers that will buy health insurance each year.
It's possible for this to unravel for example if insurance becomes too expensive for young people and their participation levels drop. Healthy people's insurance premiums subsidise the unwell, so if the only people buying insurance are the sick then insurance premiums will skyrocket. However, healthcare is a major burden on the budget and in that event I would expect government intervention.
Overall, I think Medibank has a strong business with some attractive attributes. Now I'm just waiting for a better price.
