Shares in health insurer Medibank Private Ltd (ASX: MPL) fell 3% in trade today after the stock traded ex-dividend (the date at which buyers are no longer entitled to an upcoming dividend) this morning.

With the half-year dividend equivalent to a yield of around 1.8% at today’s prices, Medibank is hardly a cash cow but the stock has been in the eyes of the market recently after a solid set of results last month.

The question that’s most likely to be on investors’ minds however is whether the stock represents a buying opportunity at today’s prices.

At $2.70 per share, Medibank trades on a Price to Earnings (P/E) ratio of around 19 times estimated full-year profit, marginally cheaper than competitor NIB Holdings Limited (ASX: NHF) on 20 times.

Although cheaper than its competitors on this measure, Medibank also has a number of attributes working in its favour:

  • Legislated revenue increases every year (around 6% p.a. in recent times) to reflect rising costs of healthcare
  • Largest insurer in the country, able to use scale to achieve good terms from suppliers
  • Investments account for under 10% of profit, but are an important growth avenue with exposure to interest rate movements and the stock market
  • More room to improve profitability by streamlining costs and claim expenses
  • Quality management team with decades of experience

Unfortunately, there are also some headwinds and uncertainties. Some are company-specific risks, such as the impending departure of long-term CEO George Savvides, an ongoing loss of market share to competitors, and the trend for consumers to downgrade from the higher-margin Medibank to the company’s cheaper AHM insurance brand.

Across the wider industry, consumers downgrading or cancelling their health insurance could potentially become a big concern. Reportedly, 500,000 customers downgraded their cover last year after premiums increased, and with price now a ‘critical’ concern for consumers that could be set to continue.

Downgrades and cancellations are likely to impact revenues and margins, as well as potentially lifting the costs of attracting and retaining customers.

Medibank is a high-quality business trading at an OK price, but without much of a margin of safety in today’s prices I would call the business a ‘Hold’.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.