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.
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.
If you want some top quality blue chips with more growth potential then I’d think about investing in these leading stocks.
For many, blue chip stocks mean stability, profitability and regular dividends, often fully franked..
But knowing which blue chips to buy, and when, can be fraught with danger.
The Motley Fool’s in-house analyst team has poured over thousands of hours worth of proprietary research to bring you the names of "The Motley Fool’s Top 3 Blue Chip Stocks for FY19."
Each one pays a fully franked dividend. Each one has not only grown its profits, but has also grown its dividend. One increased it by a whopping 33%, while another trades on a grossed up (fully franked) dividend yield of almost 7%.
The names of these Top 3 ASX Blue Chips are included in this specially prepared free report. But you will have to hurry. Depending on demand – and how quickly the share prices of these companies moves – we may be forced to remove this report.
Click here to claim your free report.
Motley Fool contributor Tristan Harrison owns shares of Ramsay Health Care Limited. The Motley Fool Australia has recommended Ramsay Health Care 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 Scott Phillips.