Shares of UnitedHealth Group (UNH 0.30%) fell off a cliff last week after the company reported that it is seeing a rise in surgeries. This development will increase its costs and impact its bottom line. Already a struggling stock, the news sent the company's shares even lower and they are now near their 52-week lows. Is UnitedHealth Group in bad shape, and could its stock fall even further? Or is now a great time for investors to consider buying shares?
Pent-up demand for surgeries will push UnitedHealth's medical loss ratio up
During the early stages of the pandemic amid lockdowns, hospitals postponed surgeries. People were also unable or hesitant to visit doctor's offices, which may have contributed to fewer folks knowing that they even needed to have surgery.
But now, with things largely back to normal, that demand has come roaring back. UnitedHealth anticipates that as a result of a big increase in surgeries, its medical loss ratio (MLR), a key metric for health insurers, will jump by 1 percentage point, from 82.1% to 83.1%. The MLR tells investors how much of a premium an insurer is using to spend on a medical claim, with the remaining amount being available to cover overhead and other expenses.
A rising MLR will hurt profitability, and that can be concerning for UnitedHealth, which normally doesn't generate a high profit margin to begin with. The good news, however, is that even with all the volatility of the past few years with the pandemic, UnitedHealth's business has remained relatively resilient:
UNH Profit Margin (Quarterly) data by YCharts.
An increase in the rate of surgeries may lead to another dip in profit margin, but it shouldn't leave a lasting impact on the business; demand for surgeries may be high now but should normalize over time, leading to more typical earnings numbers and results for UnitedHealth in the long run.
UnitedHealth still boosted its dividend
While the market reacted badly to the news, the company appeared unwavering, as UnitedHealth still made a generous increase to its dividend. On June 7, it announced that it would be raising its quarterly dividend to $1.88 per share, up from $1.65 -- that's a 14% jump in the payout.
UnitedHealth's confidence in being able to raise its dividend, particularly by such a high percentage, is a good sign that it isn't overly concerned about the current industry conditions. Plus, with the company having a modest dividend payout ratio of just 30%, its operations are efficient enough that UnitedHealth can absorb rising costs without them having a huge detrimental impact on the business and its shareholders.
Is UnitedHealth stock a good buy on the dip?
Year to date, shares of UnitedHealth are down 14% while the S&P 500 has climbed by around 15%. The healthcare stock is trading at 18 times its estimated future earnings, which is in line with the industry average.
But with UnitedHealth being a large, diversified health insurance company, I would argue that it should command a premium and trade at more than just the average given the stability it offers and the great track record that it has. Due to the negative developments, it's possible that the stock could continue to drop further in value.
However, for long-term investors who want a good, relatively safe stock to hold on to -- and one that pays a growing dividend, to boot -- UnitedHealth still makes for an excellent investment option. While its shares are down right now, I expect that they will end up recovering in the long run. Historically, this has been an excellent investment to own: UnitedHealth's 10-year return still tops 600%.
