[UPDATE 10/22/2014 – An updated version of this article was published on SeekingAlpha. Check it out!]
Welcome to a new stock analysis from DividendDeveloper! My goal in analyzing stocks on this blog is twofold. First, I want to check if a given stock meets my criteria for investing, and if it would make a good investment. Second, I want to expose my readers to companies that they may not have encountered before, whether because the company’s dividend yield is too low, their streak of increasing dividends is not long enough, or it just slipped through the cracks of their screeners.
The company that I will be looking at today is the UnitedHealth Group Incorporated (NYSE:UNH).
Quick Background:
Quoting from Scottrade:
UnitedHealth Group Incorporated (UnitedHealthcare) is a diversified health and well-being company. The Company offers a spectrum of products and services through two platforms: UnitedHealthcare, which provides healthcare coverage and benefits services, and Optum, which provides information and technology-enabled health services. It has four segments across its two business platforms: UnitedHealthcare, which includes UnitedHealthcare Employer & Individual, UnitedHealthcare Medicare & Retirement, UnitedHealthcare Community & State and UnitedHealthcare International; OptumHealth; OptumInsight, and OptumRx. UnitedHealthcare provides healthcare benefits to a full spectrum of customers and markets. Optum is a health services business serving the broad healthcare marketplace, including payers, care providers, employers, government, life sciences companies and consumers.
UNH is the nation’s largest health insurance provider, covering 85 million people, and is ranked #14 on the Fortune 500 list. The company was founded in 1977 in Minnetonka, Minnesota, and went public in 1984. The company competes in three major domestic markets: individual, group, and government. The majority of the company’s revenues are US-based, but with the 2012 merger with Amil Participações S.A., UNH is expanding into Brazil. The company likes to grow via acquisitions, completing six since 2007. The company’s competitors include WellPoint Inc (WLP), Humana Inc (HUM), and Aetna Inc (AET).
For more basic information, check out the company’s website, the 2013 annual report, and the above links.
Fun fact: An investment of $10,000 in December 2000 would be worth $59,588.52 today, all dividends reinvested. (Source: FAST Graphs)
Investment Criteria:
So now that we have a basic understanding of who UNH is and what it does, let’s run our basic screening criteria on it, with the help of David Fish’s US Dividend Champions List:
- Pays a dividend: Yes
- Has 5 years of dividend increases: Yes (5 years)
- Has not frozen dividend for over 8 quarters: Yes
- Has a Chowder number of 12 or more: Yes (105.5)
- Has am EPS payout ratio of less than 70%: Yes (27.27%)
- Pays a dividend monthly or quarterly: Yes (Quarterly; March, June, September, December)
Awesome, all 6 criteria criteria have been met! Let’s pull up FAST Graphs and see how UNH fares in round two:
- Has an S&P Quality Ranking of ‘A-‘ or better: Yes (A+)
- Has generally increasing earnings over the past 10 years: Yes
- Is fairly valued/undervalued according to the Normal P/E ratio (blue line): Yes
- Is fairly valued/undervalued according to the Intrinsic P/E ratio (orange line): Yes
Other Bonus Ratings:
- S&P Capital IQ: 3-star hold
- Scale is 1-5, 1 being ‘strong sell’, 5 being ‘strong buy’
- Thompson Reuters StockReport: 5 (optimized score of 7)
- Scale is 1-10, 10 being best, 1 being worst
- Optimized scores weight insider trading and price momentum heavier than other criteria
- Value Line: 1 for safety; 3 for timeliness
- Scale is 1-5, 1 being best, 5 being worst
Thoughts:
The dividend yield is average at 1.76%, and is well covered by cash flows and assets. UNH had $7.77 billion in operating cash flow in the past 12 months, and is sitting on $28.818 billion of cash and investments. With a low payout ratio of 27.27%, UNH has plenty of room to continue raising its dividend. Unfortunately, management doesn’t seem to take it too seriously. The dividend was held constant at the princely sum of $0.03 annually (non-split adjusted) from 1990 until 2010. The dividend was paid annually until April 2010, when it switched to the quarterly format. The first increase was in May 2010, and since then, dividend growth has been phenomenal. The 5 year dividend growth rate is 103.7%, the 3 year DGR is 37.5%, and the one year DGR is 31.6%. It remains to be seen if this growth rate will continue, and for how long. The company’s payout ratio is already a few points higher than the peer average of 18.2. To their credit, UNH has never cut their dividend. Further, the company’s stock has split 5 times since 1992, all 2-for-1 splits (1992, 1994, 2000, 2003, and 2005).
The P/E ratio is reasonable at 15.52, and Morningstar has a one year forward P/E ratio of 14.0, suggesting a slight growth in earnings over the next year. The current P/E ratio is slightly lower than the peer group’s average of 17.2. The company is more profitable than competitors. Operating margins are 7.69% (vs 6.54%), pre-tax margins are 7.16% (vs 6.09%), and the net profit margin is 4.37% (vs 3.78%). Conversely, the debt/equity ratio is 0.51, higher than the peer average of 0.4.
Morningstar rates UNH’s economic moat as ‘narrow’. Generally speaking, the health insurance industry is tough, with moats being measured in number of covered members and depth of the physicians referral network. Since UNH is the largest health insurance provider, it stands to reason that they could use their size to a) become better at pricing plans to maximize profit and b) gain preferential pricing for treatment. The company is also well diversified by market and geographical location. However, the Affordable Care Act is expected to put pressure on the company for the long term. The Stewardship Rating is ‘standard’, contrasting the consistent outperformance of the stock over the past decade with the uncharacteristically-risky and unproven attempts at diversification in the Amil merger and various acquisitions. (Source for above: Morningstar)
For the next five years, it is projected that UNH’s earnings will grow 10.0%, and the five year estimated total return is 11.2%. Both numbers are respectable considering the current healthcare climate, but are on the lower end of its peer group. For comparison, WLP’s five year ETR is 14.8%, HUM’s is 10.7%, and AET’s is 16.8% (Source: FAST Graphs).
The company has struggled with user and patient satisfaction. The company currently has a 1-star rating on ConsumerAffairs.com, the worst rating possible. Physicians rated UNH the worst payor in the US in 2012, citing the difficulty of navigating UNH’s bureaucracy and the high rate of claims denial. Healthcare executives feel the same way. Employees of UNH view the company better, but opinions are neutral overall. Conversely, UNH is rated highly by employers and civic groups. This is concerning, due to the potential for alienating current and potential customers, especially for individual plans. In fairness, UNH’s peer group is generally rated negatively, but it is concerning how UNH always shows up last in the polls. UNH has also been reacting to the Affordable Care Act in a substandard way. Since UNH is the nations’s largest Medicaid and Medicare Advantage plan provider, it has had to modify a lot of things in order to comply with the law. It has forcibly cut physicians that won’t agree to lower reimbursement rates, leading to some ill-will among the medical community. The company was also generally slow in listing plans on the healthcare exchanges, choosing to take a ‘wait-and-see’ approach. This may have left money on the table, but UNH seems to be making up lost ground successfully.
Some good SeekingAlpha articles on UNH can be found here (bullish), here (bullish), and here (neutral/bearish).
Final conclusion:
I believe UNH is an attractive investment. It passes every single one of my criteria. There are quite a few concerns I still have, including customer and employee dissatisfaction, Obamacare, and the short dividend history, so I don’t yet know if I would personally add it to my portfolio. Yet I don’t think you will go wrong if you do add it. Since some people like price points, here’s what I would do (rough estimates based on FAST Graphs):
- Buy a full position at: $93.00 or below
- Add to/accumulate between: $93.00 and $98.00
- Hold only at: $98.00 or above
What do you think? Does UNH make the cut for your portfolio? Also, how can I improve future analyses?
Disclosure: I intend to go long UNH by the end of the week (10/17/2014). Please plan accordingly.
All data is accurate as of market close, 10/13/2014. My stock analysis archive page has been updated accordingly. Please read my disclaimer here before choosing to invest. Image source is available here. Data source is FAST Graphs or company materials, unless otherwise indicated.
8 Comments
Thanks for this analysis. I’m looking to increase my healthcare sector weight and this is one company I have looked at before. Thanks for bringing it back to my attention. The dividend yield is lower than I’d like to start but it looks like it’s at fair value here.
No problem. If you want a medical insurer, UNH looks best of breed. I agree the yield isn’t impressive, but the growth rate is. Besides, it has the highest yield of its peer group. That’s why I’ll be buying in the next day or two.
Very thorough review of UNH, you are getting better and better at it
I would love to make a review on my own but I dont have much time right now (with two jobs) I just read and take notes and put it on my spreadsheet. How long does it take you to make a review (in hours including research)? I’m sure it will be faster as time goes thru practice and getting familiar with more companies. Thanks for sharing!
FFF
FrugalitytoFinancialFreedom recently posted…October Stock Purchase II
Thanks, I appreciate that! Depends on how familiar I am with the company. In general, about 4 hours or so? The criteria is pretty quick; digging into other articles and 10-Ks and annual reports is the tough part. Look forward to reading yours when you have time!
Very good review here! It’s a company I haven’t really considered but I’d like to eventually branch off into the healthcare sector to further diversify.
Special Agent Dividend recently posted…Weekly Dividend Investment Activity
Thank you! That’s why I write these, to give people exposure to companies they normally wouldn’t consider. I really wouldn’t make this a first healthcare investment, but it’s probably a worthy addition at some point.
Ahh UNH. I owned this years ago and made a good profit off of it. It was before I was investing in dividend growth stocks.
Anecdotally, I have UNH through my employer and am happy with the service. ACA or not, the insurance space isn’t going anywhere. The landscape may change, but there will always be something for insurance. If anything I would expect insurance companies to consolidate and UNH will be a big player.
Take care!
ILG recently posted…Dividend Growth Future Estimates
Well, congrats on your previous success! It’s encouraging to hear that you’re happy with UNH. Reviews tend to be excessively negative online, especially with ‘hated’ industries and companies, so it’s nice to hear that there are good experiences out there too. I agree; the ACA will change things, but insurance companies will adapt. It’s definitely not the death blow that some commenters on SeekingAlpha like to claim. Thanks for stopping by!