2 health care stocks for a healthy portfolio

Australians are getting old. The median age of the Australian population in 2011 was around 37, compared with 32 in 1991 and 28 in 1971.

One of the main concerns of the Australian government is healthcare costs for the aging population. Government statistics show that federal health spending has risen by 74% over the past 10 years and now accounts for 19% of the Australian budget, so companies that can either reduce the costs for the government or develop novel ways of treating existing problems will perform well in the future.

NIB Holdings (ASX: NHF) is one such company that reduces the load on the government. NIB is Australia’s only listed private health insurance company, and one of the top five insurers that account for around 85% of the market. NIB has grown its market share in each of the past 14 years and currently holds 7.5% of the overall market and 15% in its home state of New South Wales.

Unlike some of its peers, NIB primarily targets the younger demographic on lower-margin policies. Over time, NIB is able to add more services and thus margin onto the policy. This process has been successful so far and has resulted in NIB having the second-highest operating margin of the major insurers and one of the highest returns on capital. NIB currently trades on a PE ratio of around 16 times, which is well above its five-year average of 13, however earnings-per-share growth of over 10% is expected in each of the next two years which justifies the current valuation.

While not as useful to the government as NIB, Cochlear (ASX: COH) stands to benefit from an aging population in Australia, the US and Europe. Cochlear is a global leader in hearing implants and is starting to put more focus on older Australians with mild hearing damage as opposed to those patients with severe hearing damage.

This is a potentially lucrative market that is currently serviced by technologically inferior hearing aids that don’t quite do the job. Cochlear’s implants are superior in performance, but also in cost, which is something that the company will have to address if it is to get serious traction.

Additionally, the company is waiting on its new implant to get regulatory approval in both Australia and the US, however the decision is expected this year and will likely be a turning point after the damaging product recall in 2011.

Foolish takeaway

Healthcare stocks have had a great couple of years as investors have piled in in anticipation of strong revenue growth over the next five to 10 years. NIB is taking some of the health care load off the government, and is a beneficiary of government health insurance rebates that encourage Australians to purchase insurance.

NIB generates better margins from older Australians and should benefit in the years to come. Similarly, Cochlear’s hearing implants are primarily used by an older demographic and are attempting to target patients with more mild hearing loss as a method of increasing revenues and profit.

Looking for dividends?

Healthcare stocks don't pay huge dividends; Cochlear has a yield of 3.6% and NIB 4%. If you're more interested in stocks paying a big, reliable dividend, you should discover The Motley Fool's favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014."

Motley Fool contributor Andrew Mudie does not own share in any companies mentioned.

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