If steady growth is what you're after, it's hard to find a more reliable sector of the economy than healthcare. Americans spent a whopping $4.3 trillion on healthcare last year, and this figure is going to climb steadily as the population ages.
The population of Americans aged 65 and older climbed 38% during the decade that ended in 2020 compared to a 2% gain for the under-65 population. The U.S. Census Bureau expects the 85 and older population to more than double between 2020 and 2040.
Shares of the major health insurance benefits managers rose sharply last week in response to the latest Medicare payment policy update. Instead of the 1% adjustment that most analysts were expecting, the Centers for Medicare and Medicaid Services (CMS) called for a pay increase for Medicare Advantage programs of 3.32% in 2024.
The latest Medicare payment policy update means there will be around $13.8 billion more payments for Medicare Advantage (MA) plan providers. Anticipating a windfall, Raymond James analyst John Ransom recently upgraded these insurance stocks. Read on to see why they look like buys for cautious investors.
UnitedHealth Group
UnitedHealth Group (UNH -1.29%) collected premiums from around 7.1 million MA plan members in the fourth quarter of 2022. That was 9.5% more MA members than the company reported a year earlier.
Ransom anticipates a strong 2023 and an even stronger 2024 thanks to the better-than-expected MA payment bump. His updated price target on the stock implies a 24% gain over the next 12 months.
A U.S. District Court Judge in Texas recently overruled a mandate within the Affordable Care Act that requires insurers to cover preventive services. There will be a lengthy appeals process, but this could become another tailwind for UnitedHealth Group and the insurance industry overall.
The MA payment raise is small potatoes compared to the gains UnitedHealth Group stands to receive from providing more of the benefits it gets paid to manage. In February, it completed a $5.4 billion acquisition of LHC Group. This business has around 920 clinicians who provide in-home healthcare services throughout the U.S.
The 1.3% dividend yield that UnitedHealth Group offers isn't very exciting at the moment. It's growing so quickly, though, that patient investors could end up receiving heaps of passive income once they're ready to retire. Providing the benefits it's paid to manage allowed UnitedHealth Group to hike its dividend 83% higher over the past five years.
Cigna Group
Cigna's (CI -0.42%) Medicare Advantage membership roster shrank by 6% last year. With 7.9 million members at the end of 2022, though, it still stands to gain from the latest MA payment bump. This is why Ransom slapped a price target on the stock that implies a 32% gain over the next 12 months.
In February, Cigna predicted a 6% gain in adjusted income from operations this year. With a higher-than-expected MA payment increase in the cards for 2024, there's a good chance the company can push its needle even further.
From the global financial crisis through 2019, Cigna's dividend payout didn't budge. The company started raising it again in 2020 and at the moment, the stock offers a 1.8% yield.
Last year, Cigna generated $7.4 billion in free cash flow and needed less than 19% of these profits to meet its dividend commitment. With a tailwind from its Medicare Advantage business, the company could hike the payout much further over the next few years.