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Better buy? Medibank Private Limited vs NIB Holdings Limited

Private health insurers are getting a lot of negative attention at the moment. Premiums have risen a lot faster than inflation over the last few years, but that’s mainly because health costs have also increased.

Health insurers are a good way of getting exposure to a lot of different health conditions rather than focusing on one particular issue like Cochlear Limited (ASX: COH).

The government has made it quite clear that the public health budget will come under increasing strain over the coming years and decades as Australia’s population ages further.

The government needs the private sector to take more of the burden to make the overall system more sustainable. Medibank Private Limited (ASX: MPL) has a big part to play as the largest private health insurer.

However, it appears to me that Medibank may not be the best choice on the ASX to get exposure to this trend.

In its latest report to 31 December 2016 it reported that its total number of policyholders fell by 1% and earnings per share grew by 1.9%. This isn’t a terrible result, but it’s not a good sign for the near future.

Medibank is currently trading at 18x FY17’s estimated earnings with a grossed-up dividend yield of 5.6%.

I think a better option could be NIB Holdings Limited (ASX: NHF). In its report to 31 December 2016 it disclosed that total policyholders grew by 6.4% and its statutory earnings per share grew by 65.7%.

NIB has a product setup with Qantas Airways Limited (ASX: QAN), called Qantas Assure, which is working well for both parties so far. NIB is smaller than Medibank so there is much more scope for it to grow market share and profit.

NIB is currently trading at 22x FY17’s estimated earnings with a grossed-up dividend yield of 4.2%. I think this seems far more attractive considering NIB’s recent and expected growth over the next two years.

Foolish takeaway

I think the private health insurance sector is a good place to be operating. However, the insurers will have to be mindful of the prices they are charging in case policyholders change to a competitor, or leave the private health insurance market altogether.

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Motley Fool contributor Tristan Harrison has no position in any stocks mentioned. 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.

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