Is Medibank Private Ltd going back to $3?

Investors want different things at different stages of their lives. Younger investors usually lean more towards growth, while older investors with a significant chunk of money in the market often lean more towards financial stability.

Younger investors are probably better off avoiding Medibank Private Ltd (ASX: MPL), while older investors should be wary of paying too much for the company.

As Medibank revealed two weeks ago, it expects no growth and a flat profit result in the current financial year. Reinvestment in providing value to customers might squeeze margins, while insurance premium growth has come in below company expectations – implying it is still being beaten out by competitors.

Investors looking to grow their wealth over the long term either need company earnings to go up, or to find attractive places to reinvest their dividends, with Medibank currently paying a reasonable 4.3% per annum.

Not a growth stock

With Medibank’s outlook – slowing growth, slowing market growth, stiff competition, reinvestment in improving service quality and policy value – there’s not a lot pointing to higher earnings.

Market share losses might stop as customer ‘pain points’ (e.g. poor customer service) are eliminated, but it’s tough to imagine the company sustainably growing earnings more than a few percentage points per annum over the long term.

This means that price is crucial, and Medibank doesn’t appear to be a standout bargain. It’s currently valued at around the ASX average in terms of its Price to Earnings (P/E) ratio.

Medibank has no debt, reliable earnings, an attractive dividend, and appears unlikely to go broke. There are relatively few of these companies on the ASX, and investors seeking a reliable business to own for the long term without caring for share price movements might be justified in buying the company at today’s prices.

Investors looking for capital gains, however, need to either pick the company up at a discount or look elsewhere for their thrills.

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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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