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4 reasons why I think the Zenitas Healthcare Ltd share price is a buy

I believe that if you’re going to beat the market over the long-term it’s easier to do it with smaller businesses than larger ones. It’s much easier to double a business worth $100 million compared to one worth $100 billion.

With that in mind, I believe that the Zenitas Healthcare Ltd (ASX: ZNT) share price is a very good prospect for the future.

Here are four reasons why I’m a shareholder of the business:

Ageing population

The healthcare industry has a very strong tailwind with Australia’s ageing population. The number of people over 65 is expected to grow by 75% over the next two decades.

All of these retirees are more likely to need healthcare assistance in one form or another, which is why most healthcare stocks have done so well over the past few years and should continue to grow earnings nicely.

Zenitas operates in the home care, allied care and primary care segments of the healthcare industry. It is already generating good growth for its businesses with organic growth coming in at 7.5% for the half-year to 31 December 2017.

Home care

I’m particularly excited by the home care area of Zenitas’ business because all stakeholders involved with a patient would prefer they are cared for at home rather than a hospital. It’s nicer for them to be at home, plus it’s normally cheaper compared to expensive hospital care.

If Zenitas can become a large player, or even the number one player, in the home care space in Australia it will have enormous benefits for shareholders.

Acquisitions

Zenitas isn’t just growing through strong organic growth, it’s also make strategic acquisitions to bolster its business, expand margins and grow its geographical network.

A company shouldn’t acquire businesses just to expand, but I believe that Zenitas is very effectively using its bolt-on buys to boost its earnings.

Dividend

Finally, Zenitas has just started to pay a dividend. It’s starting with one cent per share, which represented a 37.9% payout ratio of the half-year earnings per share. If we assume another one cent per share payment at the year end the current dividend yield is 1.7%.

I would strongly recommend to the Zenitas leadership keep the dividend payout ratio below 50%, or close to 33%, and steadily increase the dividend thereby keeping most of the profit for re-investing back into growing the business.

Foolish takeaway

I’m a shareholder of Zenitas but I’m looking to add more parcels of shares as the business delivers on its growth targets. I think it’s a buy at the current price of roughly 20 times FY18’s estimated earnings.

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Motley Fool contributor Tristan Harrison owns shares of Zenitas Healthcare Ltd. The Motley Fool Australia has recommended Zenitas Healthcare Ltd. 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 Scott Phillips.