10 Large Caps to Rule Them All

After sifting through countless small-cap and mid-cap stocks to rule them all over the past 20 weeks, the time has finally come to tackle large-cap companies. Large caps will usually not offer the same torrid growth pace that can be found with small caps, but their businesses are often well-established globally, with a rich history of profitability. This global presence gives large caps a distinctiveness that small and mid-caps usually don't have -- namely, that many pay a dividend and can essentially run on autopilot in your portfolio.

For reference, here are the previous six choices:

Today I'm going to focus on the nation's largest health benefits company by membership, WellPoint (NYSE: WLP  ) .

What it does
WellPoint, through its exclusive Blue Cross and Blue Shield Association networks, operates as a health benefits company in the U.S., providing services to business, individual, Medicaid, and senior markets. As of its most recent quarter, WellPoint claimed 34.2 million medical members and 70 million members across its partner networks.

How it stacks up
Up until now I've only been verbally supportive of WellPoint on Motley Fool CAPS, but I feel the facts will speak for themselves.

Being the largest health benefits company by membership comes with perks. As the exclusive provider of Blue Cross and Blue Shield, the most recognizable name in health care, WellPoint is able to keep its closest rivals, UnitedHealth Group (NYSE: UNH  ) , CIGNA (NYSE: CI  ) , and Aetna (NYSE: AET  ) , at bay.

Although recent earnings results have been mixed -- membership is growing, but Medicare Advantage expenses are rising -- WellPoint takes care of all of the intangibles that you'd expect from a stable growth story. Last year, the company repurchased an amazing $4.4 billion worth of its own shares. This signifies faith in the company's long-term strategy and supports the theory that management feels its shares are undervalued; with it trading right at book value, I tend to agree. Shareholders certainly aren't complaining about the recently implemented $1 annual dividend, either.

What WellPoint lacks in growth rate, it far makes up for in value and stability. Let's take a closer look at how it stacks up to some of its peers.

Company

Forward P/E

Price/Book

Price/Cash Flow

Dividend Yield

WellPoint

8.3

1.0

7.3

1.57%

UnitedHealth Group

9.9

1.9

7.8

1.38%

CIGNA

7.5

1.5

7.4

0.10%

Aetna

8.0

1.4

9.9

1.58%

Humana (NYSE: HUM  )

9.9

1.7

6.2

1.31%

Coventry Health Care (NYSE: CVH  )

8.7

1.0

8.2

N/A

Source: Morningstar.

Like other companies previously highlighted in this series, one factor that stands out is the overall "cheapness" of the sector. With all six companies trading at single-digit forward earnings multiples, we need to look at other metrics to single out why WellPoint is king. Coventry's lack of a dividend and CIGNA's poor excuse for one easily take them out of the running. Aetna's rich price-to-cash flow, and Humana's and UnitedHealth's higher price-to-book make WellPoint simply a cheaper alternative.

How it could make you money
WellPoint could be in line for a huge increase in dividends over the coming years. Since it only recently began paying a dividend, there's no growth history to judge, but I think it'd be foolish (with a small "f") to assume that its payout ratio will remain as low as its current payout of 7%. Although WellPoint has $9.7 billion in debt and recently agreed to acquire CareMore for $800 million, the company has $19.6 billion in cash. I expect WellPoint to pay down some of that debt, but shareholders could be in line for significant dividend increases.

Another thing you'll want to keep in mind is WellPoint's value as a hedge investment. In both good and bad economies, people are going to need to see doctors. Even though slower economies do produce fewer trips to the doctor, the effect on health benefits companies is negligible. As one of the fastest-growing sectors in terms of demand, health-care companies should be a boon for your portfolio, and WellPoint could be the medicine you need.

What's your take on WellPoint? Share your thoughts in the comments section below and consider adding WellPoint to your personalized stock-tracking watchlist.

The Motley Fool owns shares of Teva Pharmaceutical, Apple, UnitedHealth Group, and Bank of America. Motley Fool newsletter services have recommended buying shares of Apple, Amazon.com, Teva Pharmaceutical, WellPoint, UnitedHealth Group, Coventry Health Care, and Chevron, as well as creating a bull call spread in Apple, and a diagonal call position in UnitedHealth Group.

Fool contributor Sean Williams owns shares of Bank of America, but has no material interest in any other companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong 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 that's not out to draw blood.


Read/Post Comments (3) | Recommend This Article (1)

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.

  • Report this Comment On September 23, 2011, at 4:33 PM, letcher07 wrote:

    HC Insurers are all poised to do well given low cost trends and their cash generating ability. But the author here is incorrect in stating that they will do well because people need to visit the doctor even in bad times. In fact, insurers would prefer you don't visit the doctor. This keeps more of the upfront premiums they receive in their own pockets, rather than having to pay them out for medical costs. This is why they do well in bad times. And on WLP, be aware that they have much less PPRD than the other big players going forward. That and their leverage to the individual category is likely to see the biggest margin squeeze when access expands in 2014.

  • Report this Comment On September 23, 2011, at 6:48 PM, hedgemore wrote:

    If the individual mandate is upheld and we are forced by the federal government to buy individual health plans, and subsidize others participation through state insurance exchanges, Anthem/Wellpoint is well positioned; as they offer some of the most innovative and affordable individual health plans.

    This sector is under a lot of pressure from Govt regulation to operate within tight margins. Their combined ratio - the amount they collect in premium vs pay out in claims - is now caped at 85% which means the only significant way to increase profit is by adding new members.

    My predictions? As this sector continues to become more commoditized, we will see mergers and acquisitions until we have a tri-opoly of providers. Who will be left standing? I think United Healthcare, Wellpoint and Kaiser and maybe Aetna will survive.

  • Report this Comment On September 25, 2011, at 11:02 PM, RicoSuav1 wrote:

    All the cash on the balance sheet is not free cash. While there's no doubt that WLP specifically and the HMO's generally are highly free cash flow generative, the bulk of their cash is held up in their insurance subsidiaries that are regulated by state insurance regulators to insure that the HMO's have sufficient funds to pay expected claims. The "free cash" at HMO's is typically the cash that's held at the parent or holding company. Further Wellpoint as a Blue has even more stringent restriction as to how much excess cash needs to be held in their insurance subs (the benefit of this is it makes the downside lower for WLP in the event of a major shock as they are particularly conservatively reserved). At the end of Q2 2011, WLP's cash at the holdco was approximately $2.3BN (far lower than the $18bn+ of securities available for sale and cash noted on the balance sheet).

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