Market

UnitedHealth Is Not Attractive At This Price (NYSE:UNH)

UnitedHealthcare Indiana Office. UnitedHealth Group Provides Employer, Individual and Family Health Insurance.

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Introduction

As a dividend progress investor, I’m all the time looking out for both rising my present positions or taking a look at new positions that may match my technique. Right now in my portfolio, I lack some publicity to healthcare, and whereas I’ve a number of positions in prescription drugs and medical gadgets, I haven’t got a lot publicity to well being insurers moreover CVS (CVS).

I checked out UnitedHealth (NYSE:UNH) again in 2021. I discovered the corporate to be an honest addition to a dividend progress portfolio and rated it a maintain. Since then the corporate has been outperforming the broad market as a result of larger volatility. Following a 30% enhance within the share worth, I made a decision to take one other take a look at the corporate.

I’ll analyze the corporate utilizing my methodology for analyzing dividend progress shares. I’m utilizing the identical methodology to make it simpler for me to match analyzed shares. I’ll look into the corporate’s fundamentals, valuation, progress alternatives, and dangers. I’ll then attempt to decide if it is a good funding.

According to Seeking Alpha’s firm overview, UnitedHealth Group operates as a diversified healthcare firm within the United States. It operates via 4 segments: UnitedHealthcare, Optum Health, Optum Insight, and Optum Rx. The UnitedHealthcare section affords consumer-oriented well being profit plans and providers. The Optum Health section gives entry to networks of care supplier specialists, well being administration providers, care supply, shopper engagement, and monetary providers. The Optum Insight section affords software program and data merchandise. The Optum Rx section gives pharmacy care providers and applications.

UnitedHealth Group logo.svg

Wikipedia

Fundamentals

Sales during the last decade have nearly tripled. What is much more spectacular is how steadily gross sales have elevated. Health insurance coverage is a really fundamental necessity for most individuals; thus the corporate grows revenues steadily. The progress is each organically and thru M&A and this pattern is anticipated to proceed within the foreseeable future. Going ahead, the consensus of analysts, as seen on Seeking Alpha, expects UnitedHealth to continue to grow gross sales at an annual charge of ~9.5% within the medium time period.

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Data by YCharts

The EPS (earnings per share) has nearly quadrupled during the last decade. The firm struggled via the pandemic because it was not in a position to be as worthwhile because it was up to now. During the pandemic its medical loss ratio peaked, and as we speak it stands at 84% when earlier than the pandemic it was hovering round 70%. Going ahead, the consensus of analysts, as seen on Seeking Alpha, expects UnitedHealth to continue to grow EPS at an annual charge of ~14% within the medium time period. Analysts expects that the medical loss ratio will lower with a purpose to obtain higher profitability because the EPS progress forecast is larger than the gross sales progress forecast.

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Data by YCharts

The firm has paid a rising dividend for the reason that monetary disaster of 2008-9. Before these twelve years, the corporate has paid dividends with out lowering them for greater than twenty years. The dividend yield is just not excessive at 1.1%, however this can be very secure with a payout ratio of 30%. The firm is anticipated to extend the dividend as soon as extra in June, and buyers ought to anticipate a 10-12% enhance which will likely be in keeping with the EPS progress.

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Data by YCharts

The variety of shares excellent has been lowering over the previous decade. Over the final 10 years, UnitedHealth purchased greater than 9% of its shares. In the previous, the corporate has been shopping for shares extra aggressively, but even as we speak it’s step by step retiring shares. Buybacks to complement dividends whereas the EPS is rising is all the time a bonus.

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Data by YCharts

Valuation

The P/E (worth to earnings) ratio of UnitedHealth stands proper now at 27 as the corporate’s worth is near its all-time excessive. This is sort of the best valuation for the corporate within the final twelve months. The present P/E ratio appears excessive because it trades for the next valuation even when in comparison with massive tech corporations like Alphabet and Meta.

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Data by YCharts

The graph from Fastgraphs.com emphasizes the concept the corporate is buying and selling for a premium. The blue line represents the common valuation, which equates to a P/E ratio of 18, and for the reason that pandemic, we see detachment regardless that the corporate is anticipated to develop slower than it did during the last twenty years. The firm must justify the present premium by executing very properly.

Fastgraphs analysis

Fastgraphs

To conclude, even with COVID nonetheless round UnitedHealth manages to continue to grow. The firm grows each gross sales and EPS, and it’s fueling vital progress in dividends with some buybacks. The firm is buying and selling for a premium even when the forecasted progress charge is decrease than the common progress up to now decade. Therefore, the corporate must execute properly to take care of the premium.

Opportunities

There is a robust demand for medical health insurance within the United States. Healthcare is extraordinarily costly and with personal insurance coverage being essentially the most distinguished choice, there’s room to develop as there are nonetheless thousands and thousands who aren’t insured. In addition, the corporate may cross-sell extra providers to its present purchasers and attempt to enhance its market share.

Diversification is one other vital alternative. The firm is just not solely an insurer. It additionally owns Optum Health which accounts for nearly 50% of the revenues. Optum is a pharmacy profit administration so it helps UnitedHealth’s purchasers lower your expenses on medicine and different providers. The firm is having fun with vital progress on this service because the quote beneath exhibits.

Compared to a 12 months in the past, we’re including over 1 million extra folks to Optum Health, supporting 30% extra sufferers in value-based relationships, offering over 20 million extra prescriptions, and serving 1.5 million extra folks throughout our well being profit choices.

(John Rex – Chief Financial Officer, Q1 Earnings)

COVID is slowly subsiding resulting from higher therapies and the continual growth of vaccines. Therefore, it would assist UnitedHealth enhance its medical loss ratio which peaked at 84%. This enchancment alone can have a optimistic impact on the corporate’s profitability within the brief time period as medical bills get again to regular.

Risks

The regulation is a big threat. While regulation will be each optimistic and destructive, it’s the uncertainty round it that may damage inventory efficiency. Almost each member of congress has an opinion about regulating healthcare. The firm has to organize for various eventualities with upsides and drawbacks, and political selections might have a big influence on the underside line of insurers.

Competition and inflation are different dangers. The healthcare sector is just not extraordinarily aggressive as it’s laborious to penetrate the insurance coverage market. However, in an inflationary setting, even the restricted competitors will be dangerous. The firm must cope with elevated labor prices and the elevated price of providers by suppliers, and it could not be capable of shift all of it to its purchasers.

As an general agenda, this can be a time the place UnitedHealth Group in all of its components goes to be initially, doing every thing it could actually to guard the individuals who depend on us from the forces of inflation.

(Andrew Witty – Chief Executive Officer, Q1 Earnings)

The margin of security when investing in a inventory is essential. It is very necessary in unstable occasions like those we have now proper now. At the present valuation, the corporate has no margin of security if it misses the expectations. Therefore, whereas the corporate is stable in the long run, it is probably not an ideal funding within the brief time period if the steerage is lowered or the execution disappoints.

Conclusions

UnitedHealth is a superb firm. The firm has very sturdy fundamentals and an extended monitor file of accelerating gross sales, EPS, and dividends. In addition, the corporate has expanded and has loads of progress alternatives with comparatively restricted dangers. However, the valuation and due to this fact the shortage of margin of a security threat, are making this funding not that interesting on the present worth.

This is a scary state of affairs for defensive corporations like UnitedHealth. The firm like shopper staples for instance is a haven for buyers in search of security. However, when the volatility subsides, buyers might search threat once more and the present valuation might not keep. I consider that buyers ought to watch for a ten% for a P/E of twenty-two, or add very slowly and step by step to their place.

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