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Is Medibank Private Ltd a smart investment opportunity?

As much as I think it is an attractive business with defensive characteristics, I am not a buyer of Medibank at today’s prices. There are several reasons:

  • High price (market is optimistic about the company)
  • Poor growth prospects (hard to justify high price)
  • Losing market share to competitors (a sign that business is not meeting customer needs as well as it should be)

My main reason concerns Medibank’s market share. First, the business has been the source of myriad customer complaints to the insurance industry ombudsman. Despite having a ~25% market share, last year it accounted for approximately 50% of all industry complaints – although in the company’s defense, this has improved markedly in recent times.

Additionally, the rise in insurance prices and Medibank’s higher priced insurance have driven customers to cheaper competitors like Bupa, which is now the market leader in Australia.

Market share chart from November 2016 (Source: Company presentation)

If customers are moving to competitors for reasons of price and service, it’s hard to get past the idea that Medibank must offer either (or both) better prices and better service in order to win customers. After all, health insurance is a fairly standard product, and will probably become more standardised as companies act to remove confusing, jargonistic, or outdated clauses from their policies.

What’s more, because of the above pressures, Medibank is not growing its premiums. Revenue growth at the most recent half year was 1.2%. So to my mind, Medibank is a company that is not growing, and is also exposed to a reasonable risk of lower profits or narrower margins in the future. As a result I think today’s share price is optimistic for a company that appears to be getting outdone by competitors.

However, while I am not a buyer of the business today, I am also not predicting catastrophe. Medibank appears exceedingly unlikely to go bankrupt. With its new CEO, and recent investment in new computer systems and more comprehensive customer service departments, I think the company has a good shot at improving its situation. As a result I would consider the business ‘Hold’ today.

Here are 3 blue-chip dividend shares I'd buy before Medibank at today's prices:

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Motley Fool contributor Sean O'Neill 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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