Motley Fool Australia

The better ASX buy: NIB vs Medibank shares

asx healthcare shares, stethoscope on bar chart
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Private health insurance is big business in Australia. Depending on your income, the government has various tax advantages and penalties in place that encourage a private health insurance membership. But how does this translate into a good investment?

Most ASX companies would bend over backwards to enjoy the same kind of governmental encouragement that private health companies enjoy. And that’s why (despite some significant headwinds for the sector), I think it’s a great place to find a quality, long-term investment.

But which one to choose?

Of the dozens of private health providers out there, there are only 2 that are listed on the ASX in their own right: Medibank Private Ltd (ASX: MPL) and NIB Holdings Limited (ASX: NHF).

So let’s put these 2 companies under the microscope.

Private health market share

According to a 2019 government ombudsman report, Medibank commands the largest share of the private health market of any provider with a 26.9% share. In comparison, NIB is a minnow, with just an 8.6% share. Looking at both Medibank and NIB’s market capitalisation, we can see this reflected. Current share prices tell us that (at the time of writing) Medibank is valued at ~$8.28 billion, while NIB is valued at $2.14 billion. I always prefer a company that commands the lion’s share of its market, so I’m going to give this one to Medibank.

Winner: Medibank

Growth

Despite its smaller size, NIB looks to be the fund that offers the best growth performance. Between the 2018–2019 financial years, NIB grew its gross revenue from $2.27 billion to $2.46 billion (roughly 8.4%). In contrast, over the same period, Medibank lost revenue, which fell from $7.01 billion in FY18 to $6.75 billion in FY19 (a rough 3.7% decline).

Winner: NIB

Dividend

Private health insurers have historically been strong dividend shares to own for income. So let’s have a look at each company’s dividend offerings today. On current prices, Medibank shares are offering a trailing yield of 4.36%. Meanwhile, NIB shares are treating investors to a trailing yield of 4.9%. Since both shares come with full franking credits, I’ll have to give the edge here to NIB.

Winner: NIB

Valuation

It’s always nice comparing 2 companies in the same industry on valuation grounds, as we can accurately get a feel for how the market is valuing each company. So on current share prices, Medibank going for $3 a share, which gives the share a price-to-earnings (P/E) ratio of 19.39. In contrast, NIB shares are today asking $4.70, which gives them a P/E ratio of 16.14. This tells us that the market is viewing a dollar of earnings from Medibank as more valuable than a dollar of earnings from NIB. There are many factors that influence a P/E ratio, including future growth prospects, dividend yields and branding. But since NIB shares are cheaper by the P/E ratio metric, I’ll have to give this one to NIB as well.

Winner: NIB

Foolish takeaway

Well, the results are in and it appears NIB has pipped Medibank to the post for this rudimentary comparison. I think both companies are top-notch Australian businesses that would both make good investments. But NIB appears to be growing faster than Medibank, has a higher dividend yield and a cheaper valuation. I do like that Medibank is the industry leader, but I think this is more of a function of its history of government ownership than anything else. If I were to choose between Medibank and NIB, I would probably have to go with NIB.

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As of 2.11.2020

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has recommended 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 Scott Phillips.

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