{"id":64317,"date":"2014-11-27T00:42:23","date_gmt":"2014-11-27T05:42:23","guid":{"rendered":"http:\/\/countingpips.com\/?p=64317"},"modified":"2014-11-27T00:42:23","modified_gmt":"2014-11-27T05:42:23","slug":"medibank-shares-an-irrational-buy","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2014\/11\/medibank-shares-an-irrational-buy\/","title":{"rendered":"Medibank Shares: An Irrational Buy"},"content":{"rendered":"
November 27, 2014<\/div>
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By MoneyMorning.com.au<\/u><\/a><\/p>\n

Did you buy some?<\/p>\n

I did. Although, based on the chatter around our Albert Park office, I think I’m firmly in the minority.<\/p>\n

As I’ve mentioned before, I didn’t buy it because I thought it would trade at a good value. I bought it for purely irrational reasons \u2014 an attempt to ‘get back’ in dividends some of the money the government forces me to pay to Medibank<\/strong> each year in health insurance premiums.<\/p>\n

Well, Tuesday the stock opened at $2.22. That’s seven cents above the price institutional investors paid for the stock.<\/p>\n

It’s 22 cents above the price you would have paid as a retail investor.<\/p>

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That’s another reason to be thankful that you’ve decided to take more control over your personal wealth (I assume that’s what you’ve done, seeing as you’re reading this).<\/p>\n

As an independent retail investor, you get to decide which stocks to buy, hold and sell<\/a>.<\/p>\n

If you like the Medibank Private health insurance business<\/strong>, you could buy some.<\/p>\n

If you just want to be irrational like me, and buy them out of spite, you can do that too.<\/p>\n

Conversely, if you want nothing to do with it, then, well, you can just ignore the whole thing.<\/p>\n

The poor saps who invest through a retail managed fund have no choice. In fact, not only do they not have a choice, but thanks to the pricing of the listing, those investors have ended up paying 10% more for a stock that they may not even want to own.<\/p>\n

The list values Medibank Private at $5.7 billion. That makes it the 53rd biggest company on the ASX. So it’s no small potato.<\/p>\n

But now that the company has a stock market listing, it has to do what all private companies must do \u2014 grow revenues and profits.<\/p>\n

And it will have to, because, as the Australian Financial Review<\/em> noted Monday:<\/p>\n

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‘At $2.15 a share, Medibank is valued at about 23 times its forecast net profit for 2015\u201316. The price-earnings ratio, which is used to compare how expensive companies are, shows that Medibank will trade at a premium of about 15 per cent to nib.<\/em>’<\/p>\n<\/blockquote>\n

In the interest of disclosure, ‘nib’ is HIB Holdings [ASX:NHF]<\/strong>, another health insurance stock I own in my family super fund…again, as a purely irrational way to ‘get back’ some of those forced premium payments.<\/p>\n

The AFR<\/em> article continues:<\/p>\n

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‘CLSA analyst Jan van der Schalk said the high price would “put a lot of pressure” on Medibank managing director George Savvides and his team.<\/em><\/p>\n

‘“My range is $1.55 to $1.64 so…according to our calculations it’s expensive,” he said.<\/em><\/p>\n

‘Asked if the government was selling an asset that would boost earnings by cutting costs, as opposed to a company in growth mode, Senator Cormann described Medibank as “a good business”.<\/em>’<\/p>\n<\/blockquote>\n

I won’t disagree with the Senator on that score. And not because I’m now a not-in-the-least-bit-proud owner of Medibank Private stock.<\/p>\n

But rather because what other publicly traded industry is there in Australia where the business is guaranteed by government decree to raise its prices each year?<\/p>\n

You may or may not know this, but each year the health insurance funds have to submit to the government a request to increase premiums.<\/p>\n

Needless to say, the health funds go in with a high-ball offer and the government bashes them down a percentage point or two \u2014 just so they can say they’re keeping a lid on health insurance ‘profiteering’.<\/p>\n

But regardless, the fact is that the premiums keep going up, up, up.<\/p>\n

According to the Department of Health, over the past five years, Medibank has gotten approval to increase premiums by an average of…<\/p>\n

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2010 \u2014 5.74%<\/p>\n

2011 \u2014 5.35%<\/p>\n

2012 \u2014 4.7%<\/p>\n

2013 \u2014 6.2%<\/p>\n

2014 \u2014 6.49%<\/p>\n<\/blockquote>\n

Those are the averages for Medibank, but the actual figure depends on your specific insurance policy. Some funds saw even bigger guaranteed price rises this year.<\/p>\n

NIB scored an average 7.99% premium increase. Nice for shareholders!<\/p>\n

In 2011, the Railway & Transport Health Fund Ltd got approval for a 14.38% average increase. In the same year, the Reserve Bank Health Society Ltd only needed a 1.5% increase.<\/p>\n

I guess when you can print your own money you don’t need to raise the premiums.<\/p>\n

Anyway, the point is that when the private sector receives the gift of monopoly or compulsion from the government, it’s often not a bad place to put your money.<\/p>\n

Whether that holds true for Medibank Private investors in the long term is another story.<\/p>\n

\n Kris Sayce +<\/a>
\n Publisher, Money Morning<\/em><\/strong>\n<\/p>\n

Ed note:<\/strong> The above article was originally published in Port Phillip Insider<\/em>.<\/p>\n<\/p>\n

Join Money Morning on Google+ <\/u><\/a><\/strong><\/p>\n

The post Medibank Shares: An Irrational Buy<\/a> appeared first on Stock Market News, Finance and Investments | Money Morning Australia<\/a>.<\/p>\n

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\nBy MoneyMorning.com.au<\/u><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

By MoneyMorning.com.au Did you buy some? I did. Although, based on the chatter around our Albert Park office, I think I’m firmly in the minority. As I’ve mentioned before, I didn’t buy it because I thought it would trade at a good value. I bought it for purely irrational reasons \u2014 an attempt to ‘get […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-64317","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/64317","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=64317"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/64317\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=64317"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=64317"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=64317"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}