These 2 Healthcare Giants Had Diverging Short-Term Moves, but Have Parallel Long-Term Stories

In this segment from MarketFoolery, host Mac Greer and Motley Fool senior analysts Andy Cross and Jason Moser reflect first on this week's earnings report from UnitedHealth Group (UNH 0.30%). The healthcare insurer beat on earnings, but its shares fell anyway. The analysts, though, are much more interested in the company's place in the U.S. healthcare universe, and how it will be able to use its scale to take advantage of demographic and industry trends.

Then, it's on to Johnson & Johnson (JNJ -0.46%), which got a powerful share-price pop thanks largely to its pharmaceutical sales performance. The news wasn't all good, though: A jury last week awarded $4.7 billion to plaintiffs suing the company because of evidence that asbestos in its talcum powder was contributing to cases of ovarian cancer. In context, the analysts consider the broader thesis for owning its shares.

A full transcript follows the video.

This video was recorded on July 17, 2018.

Mac Greer: Guys, let's move on to UnitedHealth reporting better than expected earnings thanks to growth in their healthcare plan memberships. UnitedHealth also raising its full-year earnings outlook. But, Jason, shares down on Tuesday. What gives here?

Jason Moser: Well, you buy the rumor and you sell the news, Mac. That's the old Wall Street bromide that gets thrown around so often. I don't think there's anything to worry about here. I think, when you're talking about any investment in the healthcare space for the years to come, you have to base that thesis on the fact that we have a massively growing demand for healthcare services, and we have a growing shortage of professionals in the space to provide those services. Companies are going to have to figure out ways to deal with this.

Typically, bigger companies have the scale and financial resources to try all sorts of different things. UnitedHealth Group is the biggest insurer in the space. I think that's what makes it such a strong investment idea -- they have the financial resources, they have the capability to deal with any and all regulatory changes in pretty short order.

It's proven to be a wonderful investment over time. It's part of the healthcare and wealthcare basket that I introduced back in February. It's performed very well up to this point. The stock is up about 13%, outperforming the market, even with today's selling. So, I wouldn't really worry about one day's action on what was clearly a good report.

I just read this book called The Healing of America by T.R. Reid. One of our members and listeners, Greg Gauges, you know Greg, he gave me the book when he was in town last. I can't recommend this book highly enough. I think a lot of people try to simplify the solutions to healthcare, and it's anything but. In the U.S., we have a very unique setup. If you read this book, it'll make more sense as to how our setup is here, and how it compares to other healthcare systems around the world.

Greer: Andy, shares of UnitedHealth up around 30% over the last year. What do you think of the stock?

Andy Cross: The most appropriate word that Jason used in his wonderful explanation of why UnitedHealth continues to do well is scale. This is a company that has been able to grow revenues and profits at double-digit rates. For a $250 billion company that has about $22 billion in cash and $35 billion in debt, they continue to run at very high levels of returns on capital and equity, and have done that for many years.

As they continue to be one of the key players in the healthcare space in America, they pay a little bit of a dividend yield, 1.5%. It's not huge. In a day of increasing interest rates, maybe it's not hugely attractive. But, the ability for them to be able to continue to grow profits and revenues at this level for the foreseeable future is quite high. We have it as a recommendation in Stock Advisor, and I think it continues to be a recommendation.

Moser: The dividend is the biggest black mark on them. I can't fathom why that thing isn't 3%. They maintain this medical loss ratio at 80-81% constantly. There's so much predictability in this business. Guys, help a shareholder out. Just bump that dividend up to 3% and really reward patient shareholders there, because they clearly make the money to do it.

Cross: Yeah, they generate $15 billion in operating cash flow a year. They buy back a lot of stock, $1-3 billion or so. But, they pay a dividend and they could probably bump it up a little bit. They do have these little acquisitions that they've done wonderfully, mostly, on, just bringing into the UnitedHealth family.

Greer: Guys, let's wrap up with a little company named Johnson & Johnson. Shares up around 4% at the time of this taping. That's a huge move --

Moser: It is a big move.

Greer: -- for such a ginormous company. Jason, it's all about strong pharmaceuticals.

Moser: It really is. I tell you, just a few days ago, it looks like a jury ruled that they needed to pay $4.7 billion in settling this Missouri asbestos case regarding the baby powder. Johnson & Johnson has the capability to deal with something like that. I'm sure that's not the end of the story for them.

When you look at the business itself, one of its strongest points is the diversity in revenue. They have the Consumer segment, they have the Pharmaceuticals segment, and the Device segment. With all of that said, it's the Pharmaceuticals segment that really brings home the bacon. It's responsible for close to 60% of operating profit. I'm not the biggest fan of how over-medicated we seem to have become as a country. It does seem like there's a pill for every problem. But, with that said, it does seem like the pharmaceuticals --

Greer: You should take something for that anxiety.

Moser: [laughs] The pharmaceuticals that are leading to the company's success are pursuing markets like cancer, so obviously very applicable markets that are really looking for solutions and advancements. My medicine is right here in this coffee mug, Mac. It's a nice, legal dose of Starbucks to get me straightened out in the morning.