Defensive, Growing Companies

Defensive stocks that provide attractive dividend command not only high valuation but offer safety-haven for institutional investors. Stocks, such as TLS, SYD, SKI, TCL, AZJ are trading between 20 to 40 P/E, with only moderate and in some cases, negative growth. The question of why investors would pay this much for infrastructure, monopoly business is the same one we ask why people are buying up jap bonds/yen, even if they offer negative interest rates.
Because they offer stable, defensive return, and over time they grow their earning.

With recent rallies in banks and mining firms, Medibank has declined from a height of about $3.2 to now $2.48 trading at P/E of 16 and offering 15.7c dividend including franking credit = 6.3% return. Most importantly, its revenue is still growing at 2.5% on the back of losing market share with potential optimization and cost-cutting benefits.

In my opinion, Medibank brand still offer differentiation amongst customers, due to its history and ex-government association. In terms of reducing government's subsidy for health insurance, private health insurance is still an essential part of life. Real cost of health service will likely be passed to customers or medical service provider (less to insurers), due to the dominance of big players in insurance industry with bargaining power, whereas medical service providers are in multiple small, clusters with revenue disperse across many players. Basically, customers can only choose a limited number of health insurers but have more options to choose which clinic and hospitals they go and see doctors.

As to the Medibank's profit stream, it generates $510m from operating and $59.3m from investment. Its core business in underwriting insurance policy contribute around 90% of profit, and is not relying on investment income, thus making its earning structure more predictable and stable. With on-going improvement in economy and potential rate hike in US, investment income can provide upside.

6.3% dividend(including franking credit), with strong, leading brand reputation, in a oligopolistic industry that offers necessity product and service, with stable income stream and ongoing optimization.