There have been few falls from grace as large as Ramsay Health Care Limited (ASX: RHC). Indeed, its share price is down around 30% over the past couple of years. Ouch!
The private hospital operator has gone from market stalwart to rejected stock in a relatively short amount of time.
What's going on?
Ramsay is highly dependent on private health insurance operators like Medibank Private Limited (ASX: MPL) as well as the government.
However, the affordability of private health insurance is getting increasingly hard for households. Australia's public health system is top quality, so the private system needs to offer value to be attractive. Premiums have been rising faster than wages for a long time.
Younger people can't afford it. Would you rather put money towards something you barely use, or towards a house deposit (and avo on toast)?
The problem is that younger, healthier policyholders essentially subsidise for the older policyholders to extract more from the system than they pay. The more young people leave the system the worse it gets.
Ramsay is also facing issues in the UK and France. NHS demand strategies are keeping Ramsay volumes lower. Ramsay's French subsidiary is acquiring European Capio AB for a very hefty price to try to grow earnings, but it doesn't seem like a good deal to me.
All of the above issues led Ramsay management to predict that profit could grow up to 2% in FY19. Not great growth for a business trading at more than 19x FY18's 'core' earnings per share (EPS).
Ramsay's greatest strength could also be its weak link. There is an avalanche of ageing retirees who are likely to need hospital care as they get older and older. This should be a decent tailwind for Ramsay.
However, who is going to pay for these older patients? Young people can't afford it. The government's budget can't be completely swallowed by it. The only option may be for the patients to sell assets and/or insurers being able to charge higher fees for more at-risk patients.
Whatever happens, Ramsay is still a high quality business which is re-investing heavily to expand some of its hospitals and build new ones. The dividend record of increasing its payout every year since 2000 is also wonderful.
Foolish takeaway
It's a very defensive business but I don't think it's a buy at the current price. I'd want a grossed-up dividend yield of more than 4% to even consider it, which would mean a share price of less than $50.
