5 Things Humana Inc. Management Wants You to Know

Here are five quotes from Humana's second quarter conference call that offers investors important insight.into whether or not to own shares.

Aug 21, 2014 at 2:08PM

Interested in owning insurers based on improving results tied to the launch of the Affordable Care Act? Remember that not all insurers benefit equally from reform.

Some insures, like WellPoint, are more exposed to exchanges, and others, like Molina Health, benefit most from Medicaid expansion. At Humana Inc (NYSE:HUM), it's Medicare plans that move the needle.

Medicare accounts for more than 75% of Humana's revenue, but exchanges and Medicaid only represent about 5% and 1.5% of sales, respectively.

That's an important take-away for investors, but it's not the only thing investors should know about Humana. Here are five quotes from Humana's second quarter conference call that investors should keep in mind when considering Humana's shares.

1. Ageing boomers are supporting growth
Roughly 10,000 baby boomers are turning 65 every day through 2029 and many of these boomers will embrace Medicare Advantage plans sold by Humana. Humana's Medicare Advantage plans replace traditional, or original, Medicare, often providing seniors with more comprehensive care, including drug benefits. That appeal appears to be resonating given this C-suite comment during Humana's second quarter earnings conference call.

"Medicare membership has grown significantly this year. While we also anticipate net growth for individual Medicare in 2015," said Bruce Broussard, president and CEO.

Membership in Humana's individual Medicare Advantage plans grew 16.4%, or 333,300 members to 2.36 million people in the past year. That helped lift Humana's revenue from Medicare members from $7.5 billion a year ago to $8.8 billion in the second quarter.

G

2. Reviewing strategic alternatives
Humana provides health care insurance to more than 13.6 million people and one of the largest line items for member cost of care is prescription medicine. As a result, Humana runs its own pharmacy benefit manager, or PBM.

That PBM negotiates lower drug prices for Humana, promotes the use of generic drugs, and helps reduce hospitalizations due to patient's failing to take their drugs as prescribed.

The PBM also works with non-Humana health care payers, such as self-insured companies, to help reduce their drug costs. While Humana's PBM is big, it's far from the biggest PBM (CVS Caremark and Express Scripts are far larger). Since drug prices are sky-rocketing, scale is becoming increasingly important to inking cut-rate prices with drugmakers. As a result, Humana appears willing to consider various alternatives for its PBM business.

"A thorough and rigorous analysis of our PBM is under way, which includes a strategic and financial review," according to Broussard.

3. Picking up the pace
Although it's Medicare that drives revenue and profit at Humana, the company is benefiting on the margin from membership growth tied to the Affordable Care Act's exchanges.

Humana's participation in exchanges allowed its individual commercial membership to jump 122% year-to-date to 1.1 million people. 

"Our health care exchange membership also grew substantially during the second quarter given the influx of applications late in the first quarter," said Broussard.

That influx of new members helped lift Humana's fully insured revenue from $1.6 billion a year ago to $2.2 billion in the second quarter.

4. Keeping a lid on costs

"The majority of our ACA membership was effective in the second quarter and the very early drug claims data indicate that those members are on average younger and healthier than those that enrolled in the first quarter," said Humana senior Vice President and CFO Brian Kane.

That's great news for shareholders given that fear over medical care costs has served as a lid on shares in the past.

So far, that fear hasn't materialized. During the first six months of 2014, Humana's medical loss ratio, or the amount of premiums the company has spent on member health care, has stayed pretty much in check versus a year ago. The ratio in its retail segment, which includes the exchanges, has remained unchanged at 85%.

5. Conviction to reward investors
At a bit shy of 1%, Humana's shares don't offer shareholders a very large dividend yield, but that could change in the future.

The company continues to actively buy back shares, spending $101 million last quarter to repurchase over 805,000 shares. And during the company's conference call, management indicated that it would consider its capital allocation strategy carefully given that clarity into capital needs has improved over the past two quarters.

"With regard to capital allocation, over the coming months, we are committed to taking a fresh look at our financial leverage, capital allocation and return policies. We will evaluate increasing the amount of capital we return to shareholders beyond what we have historically done while considering the needs and opportunities of our business," said Kane.

Since Humana's cash dividend payout ratio, a measure of how much of the company's operating cash (after preferred dividends and capex) is used to pay common dividends is lower than competitors UnitedHealth Group and WellPoint, there could be room for a boost.

HUM Cash Dividend Payout Ratio (Annual) Chart

HUM Cash Dividend Payout Ratio (Annual) data by YCharts

Fool-worthy final thoughts
Despite Humana's membership and revenue growth, the company continues to forecast earnings per share of just $7.25-$7.75 this year. If it delivers at the low end of that guidance it would represent a decline from the $7.73 the company earned in 2013.

That said, an older, longer-living America will continue to offer Medicare growth opportunities and management has indicated that pricing for plans offered through exchanges next year could make the exchange business break-even in 2015. If that's true, a larger membership base could allow for earnings growth in the future.

Even Humana may struggle to outpace these top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

 

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers