With a market cap of $472 billion and tens of millions of people covered under its plans, UnitedHealth Group (UNH -1.28%) is the undisputed king of health insurance stocks. But over the last 12 months, its share price fell by 2%, badly lagging the market's comparative returns of 17%.
Is this healthcare titan tapped out as an investment opportunity, or just taking a breather? Let's investigate a couple of arguments in favor of each of those possibilities.
The case for buying UnitedHealth stock
The bull thesis for UnitedHealth is quite simple: As long as people need healthcare in the U.S., they or their employers will need to buy health insurance every month. And as long as healthcare resources are both scarce and improving in quality over time, there will always be plenty of money to be made by both insuring people and then actually delivering care to them. And since UnitedHealth has two main segments -- one that offers health insurance and prescription coverage, and another that delivers healthcare -- it's already perfectly positioned to continue to do what it's doing for the benefit of its shareholders over the long term.
It's hard to see how the bull thesis is incorrect or incomplete. In total, the company brought in nearly $93 billion in revenue in its second quarter alone, making it one of the largest businesses in the world. Its insurance plans cover more than 51 million people, with more than 1 million additional people added so far in 2023 alone. That almost certainly means it has the benefit of economies of scale to keep its costs lower than new entrants to the market could offer. Plus, over the last five years, its quarterly revenue rose by 63%, meaning that there's likely no shortage of room to keep growing into its gargantuan markets, which bodes well for its future.
Per management, the company expects to continue growing its earnings per share (EPS) at a rate between 13% and 16% annually. At the same time, while stopping short of promising that it'll continue indefinitely, management points to dividend growth of greater than or equal to 10% per year since 2010 as further evidence of the company's appeal to investors. So buying the stock means owning a company that's proven to be good at operating its business model over time, giving you stable and moderately paced growth both in its share price and its payout.
There are still a few risks to understand
UnitedHealth is a strong business, and it won't be going anywhere anytime soon. Nonetheless, there are a handful of risks that could make its next 10 years a bit more difficult than its last 10, which could dissuade some investors from wanting to buy it.
First, for it to make money from its insurance business, it needs to collect more insurance premiums than it pays out to cover the cost of care. Paying out at higher-than-anticipated rates puts pressure on earnings. And while there's no guarantee it'll ever amount to much financially, anything that increases the burden of chronic illness for its covered population -- like perhaps the lingering health effects of a recent coronavirus pandemic -- could imply a slowing of growth. But there's no evidence of that happening just yet.
Second, and more importantly, it is no secret that the U.S. healthcare system is deeply dysfunctional, with big-picture health outcomes like average life expectancy badly lagging in comparison to those of peer nations that spend vastly less per capita. As a result, politicians will doubtlessly continue to be highly motivated to advance packages of reforms, much like they did with the Affordable Care Act (ACA) in 2010. There is a significant chance that future reforms will affect UnitedHealth's ability to compete, and the impacts of new legislation are not guaranteed to be positive for shareholders whatsoever. So in the long term, the bull thesis might get derailed by the rules of the healthcare coverage and delivery game getting changed.
But is the stock a buy? It's probably not a bad option for most investors, given its great track record of stable growth and its reliable business model. Still, I won't be buying it anytime soon due to the second risk that I outlined above. Buying shares of a company that's highly vulnerable to legislative disruption doesn't sound great to me, even if there's no guarantee of an actual problem happening.
