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 — an attempt to ‘get back’ in dividends some of the money the government forces me to pay to Medibank each year in health insurance premiums.

Well, Tuesday the stock opened at $2.22. That’s seven cents above the price institutional investors paid for the stock.

It’s 22 cents above the price you would have paid as a retail investor.

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).

As an independent retail investor, you get to decide which stocks to buy, hold and sell.

If you like the Medibank Private health insurance business, you could buy some.

If you just want to be irrational like me, and buy them out of spite, you can do that too.

Conversely, if you want nothing to do with it, then, well, you can just ignore the whole thing.

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.

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.

But now that the company has a stock market listing, it has to do what all private companies must do — grow revenues and profits.

And it will have to, because, as the Australian Financial Review noted Monday:

‘At $2.15 a share, Medibank is valued at about 23 times its forecast net profit for 2015–16. 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.’

In the interest of disclosure, ‘nib’ is HIB Holdings [ASX:NHF], 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.

The AFR article continues:

‘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.

‘“My range is $1.55 to $1.64 so…according to our calculations it’s expensive,” he said.

‘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”.’

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.

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?

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.

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

But regardless, the fact is that the premiums keep going up, up, up.

According to the Department of Health, over the past five years, Medibank has gotten approval to increase premiums by an average of…

2010 — 5.74%

2011 — 5.35%

2012 — 4.7%

2013 — 6.2%

2014 — 6.49%

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.

NIB scored an average 7.99% premium increase. Nice for shareholders!

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.

I guess when you can print your own money you don’t need to raise the premiums.

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.

Whether that holds true for Medibank Private investors in the long term is another story.

Kris Sayce +
Publisher, Money Morning

Ed note: The above article was originally published in Port Phillip Insider.

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The post Medibank Shares: An Irrational Buy appeared first on Stock Market News, Finance and Investments | Money Morning Australia.

By MoneyMorning.com.au