Why this big bank became a major shareholder of NIB Holdings Limited

There isn’t a bigger vote of confidence for an ASX-listed company than Commonwealth Bank of Australia (ASX: CBA) becoming a major shareholder.

NIB Holdings Limited (ASX: NHF) is one of Australia’s largest private health insurers. Commonwealth Bank currently owns just over 5% of NIB shares and clearly believes in its long-term future.

NIB has done a good job of sweeping up a lot of the growth in the private health insurance sector in the last few years. In FY17 it grew its net policyholders in Australia by 3.8%. It grew its market share from 8.1% to 8.3%.

The private health insurance industry has come under pressure in recent times for how big the premium increases have been in recent years. This has been hard to swallow for policyholders when inflation and wage growth has been so low. In its Australian segment NIB grew its net margin to 6.4% from 6%, which shows it is making more profit on each dollar than it did before.

I think NIB could be a good long-term investment for a few different reasons.

NIB has shown it can very effectively grow the business, it is a well-run machine. In FY17 its underlying operating profit by 16.4%, which was on top of several years of good growth.

The government needs the private health insurance to succeed. The ageing demographics of Australia will lead to more patients going to public hospitals. If the private health industry and the government can encourage people into the private system that should save on the amount of hospital beds needed and the inevitable wait times in emergency waiting rooms & for non-urgent operations.

I like NIB as a healthcare option because it gives exposure to all the different health problems, rather than just one issue that other companies focus on, like Cochlear Limited (ASX: COH).

Foolish takeaway

The drop in share price of around 10% over the past week means that it’s currently trading at 23x FY18’s estimated earnings. I think this is a pretty good price to pay for NIB considering it could keep delivering decent growth for many years to come. But, sustained low premium growth could slow NIB down.

These top stocks would also be good additions to a portfolio instead of NIB.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Cochlear Ltd. and NIB Holdings Limited. 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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