Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



A Brief History of UnitedHealth's Returns

Despite constant attempts by analysts and the media to complicate the basics of investing, there are really only three ways a stock can create value for its shareholders:

  1. Dividends.
  2. Earnings growth.
  3. Changes in valuation multiples.

In this series, we drill down on one company's returns to see how each of those three has played a role over the past decade. Step on up, UnitedHealth (NYSE: UNH  ) .

UnitedHealth shares returned 200% over the past decade. How'd they get there?

Dividends provided a small boost. Without dividends, shares returned 192% over the past 10 years.

Earnings growth over the period was incredibly strong. UnitedHealth's normalized earnings per share grew at an average rate of 24% a year for the past 10 years. That's among the best results you can find among large-cap companies. Of course, it also highlights what has become a touchy public-relations issue -- that surging health care costs are padding the bottom line of insurance companies.

Leave that issue aside for now. UnitedHealth's stock has been a strong performer, but not as strong as it should have been given 24% annual earnings growth. Why? This chart explains it:

Source: S&P Capital IQ.

UnitedHealth's valuation multiple has utterly collapsed -- from 27, 10 years ago to 11 today. That's prevented a lot of the earnings growth from showing up in shareholder returns. The same has been true for competitors WellPoint (NYSE: WLP  ) and Aetna (NYSE: AET  ) ; compressing valuation multiples have put the lid on shareholder returns.

The reason for the valuation fall is twofold. One, shares were likely overvalued 10 years ago. The fall over the past decade has been a reversion to normal. Two, the 2010 health care reform bill adds multiple layers of uncertainty that the market hasn't -- more than a year later -- gotten comfortable with.

That uncertainty could indeed affect future earnings. But the good news is that, at 11 times earnings, shares are already pricing in a lot of bad news. While shareholders suffered through a valuation contraction over the past decade, the coming one could very well reward them with valuation expansion.

Why is this stuff worth paying attention to? It's important to know not only how much a stock has returned, but where those returns came from. Sometimes earnings grow, but the market isn't willing to pay as much for those earnings. Sometimes earnings fall, but the market bids shares higher anyway. Sometimes both earnings and earnings multiples stay flat, but a company generates returns through dividends. Sometimes everything works together, and returns surge. Sometimes nothing works and they crash. All tell a different story about the state of a company. Not knowing why something happened can be just as dangerous as not knowing that something happened at all.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of UnitedHealth Group. Motley Fool newsletter services have recommended buying shares of UnitedHealth and WellPoint, as well as creating a diagonal call position in UnitedHealth. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1579265, ~/Articles/ArticleHandler.aspx, 10/22/2016 2:06:30 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 16 hours ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 4:01 PM
UNH $145.37 Up +0.30 +0.21%
UnitedHealth Group CAPS Rating: ****
AET $111.25 Up +0.32 +0.29%
Aetna CAPS Rating: ***
ANTM $123.50 Down -0.53 -0.43%
Anthem CAPS Rating: *****