For your average investor it's best to think long term as time in the share market trumps all else when it comes to generating strong returns. There's one key condition though in that you must find and buy companies that are likely to deliver decent growth over the long term.
At the end of the day share prices will follow earnings and dividend growth higher or lower, so companies that are able to consistently grow their dividend payouts for example are likely to perform well for investors.
One such company available to investors from within the S&P/ASX 200 (Index: ^AJXO) (ASX: XJO) index of leading companies is private hospital operator Ramsay Health Care Limited (ASX: RHC). It ticks the boxes for long-term focused investors and below I outline five reasons that mean it should be at the top of investors' watch lists or in their portfolios.
- Wide Moat – Successfully operating hospitals for a profit is a complex undertaking that requires investment, expertise, and regulatory approvals. In other words price-based competition is likely to be limited for a hospital operator like Ramsay, compared to other companies on the ASX that are always threatened by competition or changing market dynamics.
- Organic Growth – this is the secret to generating strong returns for investors across any business and thanks to the demand for its hospital places the company is able to deliver consistently strong organic growth. Public healthcare spends worldwide only ever go up over the long term and this is an excellent position for a private hospital operator that also provides services for publicly funded patients.
- Brownfield Expansion – the construction of new hospitals and medical centres is another big growth driver for Ramsay. For the six-month period ending December 31 2016 Ramsay completed $142 million of new developments and achieved an additional $90 million of development approvals.
- Acquisitive strategy – Ramsay's management team has a strong track record of acquiring overseas hospitals and applying its management model onto them with great success. The group is performing well in the giant French and British healthcare markets with growth likely over the long term.
- Dividend Growth – Ramsay Health Care has increased its dividend every year since 2000. In FY 2016 it paid $1.19 in dividends on earnings of $2.21 per share, which means its payout ratio is relatively low at around 50%. In turn this means Ramsay can re-invest a substantial amount of its profits back into the business to generate more growth for investors over the long term. This is another essential feature to find in a business for growth-oriented investors.
Of course Ramsay Health Care is far from perfect as an investment as it carries substantial risks around a slowdown in public funding for example, while it also has significant debt. In fact net debt is 2.3x annual EBITDA which means the business and share price could get hammered if the company does not perform to expectations.
Those expectations are extremely high as well with Ramsay trading on 31x trailing earnings, with the share price at $69.50 today. The group is expecting earnings per share growth in the region of 12% to 14% in the year ahead, which just about justifies its lofty valuation if you look out to FY 2018 and beyond in my opinion. If you refuse to pay too much for the best growth businesses you can often lock yourself out of the best companies forever and I would rate the stock as a buy at its current valuation.
However, an investment in Ramsay Health Care should only be as part of a balanced portfolio.
