Over the last 10 years, shares in Ramsay Health Care Limited (ASX: RHC) have risen by 751%. This is significantly higher than the still impressive capital gains made by health care peers CSL Limited (ASX: CSL) and Cochlear Limited (ASX: COH) which are up 128% and 146% respectively. Looking ahead to the next decade, Ramsay could prove to be an excellent stock to own for these three reasons.
Ramsay’s cash flow is exceptionally strong and should allow it to continue with an ambitious M&A programme, as well as raise dividends over the long term. For example, Ramsay’s net operating cash flow last year was $746 million and despite paying out $486 million in an ambitious capital expenditure programme, Ramsay’s free cash flow was $260 million. This was sufficient to cover dividends 1.32 times and indicates that payments to shareholders have substantial headroom through which to grow so as to boost Ramsay’s current yield of 1.5%.
Further, Ramsay’s ambitious M&A programme is very affordable given the strength of its free cash flow. This has been a key driver of its growth in the last decade and with the euro weakening in recent months there may be opportunities for Ramsay to expand its operations in Europe.
Ramsay’s growth strategy also indicates that it has the potential to generate alpha over the next decade. For example, in the first half of the 2016 financial year Ramsay completed $126 million of developments as part of its brownfield development programme. This included 186 beds and eight operating theatres. Over the course of H2 2016 and H1 2017, it expects to deliver 310 net new beds and 12 theatres across Australia.
Further, Ramsay approved $197 million of new developments in FY 2015 and this shows that it has strong growth potential beyond the near term. While the healthcare space is becoming more competitive in terms of emerging technology leading to improving efficiencies, Ramsay’s brownfield strategy continues to keep its facilities up to date and in my view this puts the company in a strong position to deliver long term growth.
As well as internal factors, Ramsay is also set to benefit from favourable demographics over the next decade. In fact, over the last 10 years Ramsay has been able to grow its revenue at an annualised rate of 13.6%, while its cash flow and earnings have risen by 19.4% and 16.9% per annum during the same period.
This has been due at least in part to favourable demographics and with the prevalence of chronic diseases continuing to increase due to an ageing population which is living longer, Ramsay looks set to benefit from a continued rise in demand for its services over the next decade.
Therefore, with sound finances, an excellent growth strategy and strong operating conditions brought about by favourable demographics, I think that Ramsay is a top stock to buy and hold for the next decade.
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As of 2.11.2020
Motley Fool contributor Robert Stephens 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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