Friday, August 7, 2015

UnitedHealth Group (UNH) Dividend Stock Analysis

UnitedHealth Group (UNH) is the largest, most diversified health care enterprise in the United States. It serves more than 85 million individuals worldwide. The company operates under two complementary business platforms, UnitedHealthcare for health benefits, and Optum for health services. UnitedHealth Group is a dividend contender, which has raised dividends for 6 years in a row.

The most recent dividend increase was in June 2015, when the Board of Directors approved a 33.30% increase in the quarterly dividend to 50 cents/share. High dividend growth is typical of companies in the first stage of dividend growth.

The company’s largest competitors include Aetna (AET), Humana (HUM), and Anthem (ANTM).

Over the past decade this dividend growth stock has delivered an annualized total return of 9.80% to its shareholders.

The company has managed to deliver an 11.20% average increase in annual EPS over the past decade. UnitedHealth Group is expected to earn $6.32 per share in 2015 and $7.31 per share in 2016. In comparison, the company earned $5.70/share in 2014.

UnitedHealth Group has consistent history of share repurchases. The company has been able to reduce the number of shares outstanding from 1.330 billion in 2005 to 973 million by 2015. I would have honestly preferred special dividend distributions, rather than the “forced dividend reinvestment” that share buybacks provide for investors.

1) The United Healthcare segment operates under four areas and accounted for roughly 71% of revenues in 2014 :

- UnitedHealthcare Employer & Individual offers an array of consumer-oriented health benefit plans and services for large national employers, public sector employers, mid-sized employers, small businesses, individuals and military service members in the TRICARE west region. This area accounted for roughly 36% of the segment revenues.

- UnitedHealthcare Medicare & Retirement provides health and well-being services to individuals age 50 and older, addressing their unique needs for preventive and acute health care services, as well as services dealing with chronic disease and other specialized issues common among older individuals. This area accounted for roughly 39% of the segment revenues.

- UnitedHealthcare Community & State is dedicated to serving state programs that care for the economically disadvantaged, the medically underserved and those without the benefit of employer-funded health care coverage, in exchange for a monthly premium per member from the state program. This area accounted for roughly 20% of the segment revenues.

- UnitedHealthcare Global provided medical benefits to more than 4 million people, principally in Brazil, but also residing in more than 125 other countries. This area accounted for roughly 6% of the segment revenues.

2) The Optum segment operates under three areas and accounted for roughly 29% of revenues in 2014:

- OptumHealth is a diversified health and wellness business serving the physical, emotional and financial needs of more than 63 million unique individuals. This area accounted for roughly 23% of the segment revenues.
- OptumInsight provides technology, operational and consulting services to participants in the health care industry. This area accounted for roughly 11% of the segment revenues.
- OptumRx provides a full spectrum of pharmacy benefit management (PBM) services to more than 30 million Americans nationwide, managing more than $40 billion in pharmaceutical spending annually and processing nearly 600 million adjusted retail, home delivery and specialty drug prescriptions annually. This area accounted for roughly 67% of the segment revenues.

Future growth in earnings could be realized from bolt on acquisitions, international expansion and increased number of customers. While the number of people with healthcare in the US will increase after the Affordable Care Act, this could also result in pressure on pricing and profitability for health insurer amid increased competition. In addition, cuts in medicare could also result in lower revenue growth. Approximately 87% of people in the US had healthcare insurance either from a private plans such as an employer plan or from a government plan. The ratio of private plans to government plans is close to 60%/40%.

The company has a dominant position in healthcare – it can scale fixed costs, and gain cost advantage with providers that could provide lower costs. United Healthcare also has expertise in underwriting, which can help in pricing plans accordingly to still earn a profit.

Of the $130 billion in revenues from 2014, approximately $115 billion were from premiums. Premium revenues are primarily derived from risk-based health insurance arrangements in which the premium is typically at a fixed rate per individual served for a one-year period, and the Company assumes the economic risk of funding its customers’ health care and related administrative costs. Approximately $10 billion was from service revenues. Service revenues consist primarily of fees derived from services performed for customers that self-insure the health care costs of their employees and employees’ dependents. Under service fee contracts, the Company recognizes revenue in the period the related services are performed. For both risk-based and fee-based customer arrangements, the Company provides coordination and facilitation of medical services; transaction processing; customer, consumer and care professional services; and access to contracted networks of physicians, hospitals and other health care professionals. These services are performed throughout the contract period. The revenue derived from “Products” is a little over $4 billion, while investment revenues were approximately $700 million. For the Company’s OptumRx pharmacy benefits management (PBM) business, revenues are derived from products sold through a contracted network of retail pharmacies or home delivery and specialty pharmacy facilities, and from administrative services, including claims processing and formulary design and management.

Several of my employers over the years have provided me with health and dental insurance through United Healthcare. While I am familiar with the company, this analysis is still my first look at the company. As a result, I am going to keep the qualitative section shorter than it should be. However, I will update it in 2016/2017, when I review the company again.

The quarterly dividend payment has quadrupled over the past five years, from 12.5 cents/share in 2010 to 50 cents/share in 2015. In 2010 the company sharply raised its annual dividend from 3 cents to 50 cents/share and switched to paying distributions every quarter. Prior to that, the company paid an annual dividend of 3 cents/share. this high dividend growth is typical for companies in the first phase of dividend growth. Therefore the best gauge for future growth in dividends will be the expected growth in earnings per share.

In the past decade, the dividend payout ratio increased from less than 1% in 2005 to 24.70% in 2014. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Return on equity has decreased slightly over time, from a high of 23.20% in 2005 to 17.40% in 2014. I generally like seeing a high return on equity, which is also relatively stable or rising over time.


Currently, I find the company to be attractively valued at 18.70 times forward earnings and an yield of 1.70%. I am actually considering initiating a small position in the stock, subject to availability of funds at yields at 2% or above. I could buy a few shares of United Health Group, which would make it easier to monitor through my broker Interactive Brokers. In order to be considered for a full position in my portfolio, a company would have had to grow dividends for at least a decade.

Full Disclosure: None



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