The western world is facing an ageing population demographic, which presents many problems and opportunities. How will retirees fund their retirement? How will public hospitals cope when they are already busy now? How will the elderly look after themselves as they get older?
There are investment opportunities for all three of those questions. The one that I will focus on in this article is where the elderly will live.
Several businesses have listed on the ASX in recent years that could benefit from this ageing tailwind. Here are three reasons why I think Japara Healthcare Ltd (ASX: JHC), the aged care operator, is a great long-term investment:
The aged care population is set to explode
The vast majority of current aged care residents are over the age of 70 because that's around the age they start needing help. The baby boomer generation is only just starting to hit this age and then there is another 20 years of the cohort reaching 70.
The baby boomers will produce a significant boost to the number of people in Japara's facilities, assuming that it maintains the market share it currently has. If it maintains its profitability and increases the revenue per resident, Japara will grow significantly over the next 20 years.
Government funding
There has been a lot of uncertainty surrounding government funding in recent years, but for now it's still a positive. The government provides significant revenue to Japara for each resident, which means that even in a recession Japara will still get its allocated money.
The government does need the sector to succeed, so over the long term I think Japara's revenue will keep growing, even if it requires the resident to foot more of the cost.
Huge dividends
Since it listed Japara has shown that it's willing to pay large dividends, it's currently paying out 100% of its net profit after tax. I'm sure the payout ratio will decrease over the years, but it means it currently has a huge grossed up dividend yield of 8.09%. It's rare to find a share that has long term prospects and a big dividend.
Risks
The short term risk is funding, as the last year has shown with its rollercoaster movements of the share price. The government appears to have put investors at ease for now.
The long term risks are funding and competitors. I think the funding issue will be resolved by future governments, residents and the aged care industry. As long as Japara can keep its market share and grow revenue & profits then competitors shouldn't necessarily be a problem.
Time to buy?
Japara is currently trading at 17.6x earnings with a grossed up dividend yield of 8.09%. I think now is a good time to buy while uncertainty surrounds the industry, investors would get a large dividend and a business that's growing over the long term. However, if you want a stock that's growing strongly now instead, you should check out this stock.
