UnitedHealth Group (UNH 0.30%) is the largest private health insurance company in the U.S., with more than 400,000 employees. It pulled in $324.2 billion in revenue last year, making it the largest Fortune 500 healthcare company.
UnitedHealth Group's shares are down a little more than 12% this year. The stock has been slumping since the company mentioned last month at the Goldman Sachs Global Healthcare Conference that elective surgeries, which had declined during the pandemic, were on the rise.
That concern was echoed by a competitor, Humana, which in a Securities and Exchange Commission (SEC) filing last month said that claims for inpatient stays, emergency department visits, outpatient surgeries, and dental services are rising faster than expected.
Data source: YCharts
That means that medical costs are likely to rise and would cut into the margins for at least part of UnitedHealth's business.
It's interesting that just the possibility of increased costs was enough to hurt the stock because UnitedHealth's growth has been so consistently solid. Over the past decade, the stock's shares have risen more than 597%, while earnings per share (EPS) have climbed 285%.
The decline in the stock's price presents an opportunity to buy a solid company with great long-term growth prospects.
The model of consistency
In the first quarter, UnitedHealth reported revenue of $91.8 billion, up 15% year over year, and net income of $8.1 billion, up 16% from same period last year. That shouldn't be a surprise because the company has had 11 consecutive quarters of increased revenue.
Insurance premiums at UnitedHealth rose 13.6% year over year to $73 billion, while the company said it added more than 1 million new customers. The company's second-quarter earnings report is scheduled for July 14, before the market opens.
Even if UnitedHealth's EPS takes a dip this year because of rising costs, the company could simply raise premiums and cut benefits to make up the difference next year. With its size, it has that kind of pricing power.
UnitedHealth also benefits from increased healthcare spending
The trend toward more nonessential surgeries is likely to ease over time, so the impact on UnitedHealth's bottom line probably will be negligible in the long run. That is especially true because its fastest-rising segment, Optum Health, benefits from increased healthcare spending. The segment manages drug benefits and provides value-based care, delivering information- and technology-enabled health services.
In the first quarter, Optum reported revenue of $54.1 billion, up 25% year over year, and I don't see that number falling if healthcare spending continues to rise. Optum should also get a boost from its February purchase of home healthcare company LHC Group and from its purchase in June of home health, hospice, and high-acuity care company Amedisys.
One lurking concern is that the federal government is taking a closer look at Medicare and Medicaid, and much of UnitedHealth's income comes from Medicare Advantage customers. The company dropped a plan to require prior authorizations for physicians to conduct colonoscopies and other endoscopic procedures after several doctor groups sent a letter to UnitedHealth Chief Executive Officer Andrew Witty. As it is, the CMS has tightened regulations around prior authorization to cut through red tape and prevent delays.
A dividend that delivers
UnitedHealth Group has increased its quarterly dividend for 14 consecutive years, including a 14% bump last month to $1.88 per share. Although the yield of around 1.5% is slightly below the S&P 500 average yield of 1.56%, the company has increased the dividend by 571% over the past 10 years. The company's payout ratio is about 30%, so there's plenty of room for more increases.
On top of that, UnitedHealth helps long-term investors because it regularly does stock buybacks.
Wait for the second-quarter earnings report?
As mentioned, the impact of rising elective surgeries will balance itself out. To some extent, the concerns raised by UnitedHealth and Humana about rising costs from elective surgeries may also be a way to deflect pressure for what some see as exorbitant profits, particularly for companies that offer Medicare Advantage plans.
It's possible that UnitedHealth's revenue could drop in the second quarter, pushing the stock down further. However, trading at only 19 times forward earnings, UnitedHealth is a bargain when you look at its record of growth and its ability, because of its size, to dominate premiums pricing.
It is possible that a revenue decline also would give a better opportunity to buy a solid stock on the dip. However, if despite raising the alarm about increased costs, the company rolls out another stellar quarterly report, it may make sense to buy the stock now before it rebounds. Either way, for long-term investors, the stock is a solid choice.
