UnitedHealth Group (UNH 0.30%) has seen its shares decline more than 6% so far this year. That may not seem like much of a drop, but for a company as steady as UnitedHealth, that represents a significant dip. The company, which is both a healthcare insurer and healthcare provider, has been the picture of stability, with a beta of just 0.89 (indicating lower than average volatility).
The company is so big that there can be a little confusion among some investors as to its scope. Let's take a closer look and see how to better understand the company.
UnitedHealth operates in two segments -- its insurance side, UnitedHealthcare, and its health services side, Optum Health. The company's size gives it an economy of scale. In the second quarter, it reported revenue of $92.9 billion, up 16% year over year. Both its segments participated in that growth with double-digit revenue increases. UnitedHealth Group also reported earnings per share (EPS) of $5.82, compared to $5.34 in the same period last year.
Its UnitedHealthcare business has a 12% share of the U.S. health insurance market, making it the largest insurer in the U.S., according to a report by Value Penguin. In the second quarter, the segment reported revenue of $70.2 billion, up 13% year over year. Last year, UnitedHealthcare networks included 1.7 million physicians and other healthcare professionals, along with 6,400 hospitals and other facilities.
Optum uses technology and data to improve care and says it has more than 70,000 physicians connected with its service, the Optum Rx pharmacy service. It also has consumer healthcare products, such as pulse oximeters, blood pressure monitors, and baby monitors. In the second quarter, the segment reported revenue of $56.3 billion, up 25% over the same period last year.
A big edge in negotiations
The rise in inflation, especially in increased healthcare wages, pits medical providers, such as hospitals and doctors' groups, against payers, such as UnitedHealthcare. At times, the negotiations over contracts have been fierce, but this is where UnitedHealthcare excels because of its size.
The company has been in several very public battles with hospital companies that are looking for better reimbursement rates. Those battles are rarely even, though, thanks to UnitedHealthcare's size. Hospitals are trying to rein in increased labor costs and are seeing more revenue because of increased patient volume, but they don't have the financial strength that UnitedHealthcare does. The company has seen EPS and revenue climb every year for more than a decade.
UnitedHealthcare is one of the U.S.'s largest Medicare Advantage (MA) insurers. Health policy research group KFF estimates that UnitedHealthcare will get an MA bonus of $3.9 billion this year, the highest among all insurers.
The company is at a beneficial nexus of the rising population of seniors and increased spending on healthcare. According to the Census, 77% of U.S. adults older than 65 were members of a Medicare or Medicare Advantage plan in 2021. By 2030, when all baby boomers will be older than 65, the Medicare population is expected to reach 69.7 billion. Even with plenty of competition for Medicare Advantage customers, UnitedHealthcare will likely continue to see growth in the number of customers, with 20% of the U.S. population expected to be 65 or older by 2030.
A commitment to shareholder value
UnitedHealth Group boosted its quarterly dividend by 14% to $1.88 per share this year, the 14th consecutive year it has increased its dividend. The yield is around 1.54%, right at the S&P 500 average, but the company has been aggressive in raising its dividend, boosting it by 616% over the past 20 years. Even with all those increases, the cash dividend payout ratio is only about 17%, meaning there's plenty of money available to continue to raise the dividend.
The company consistently participates in stock buybacks, including $5 billion in stock repurchases in the second quarter. The buybacks lower the number of outstanding shares, meaning shareholders get a bigger percentage of the company's earnings. Buybacks help keep stock prices high and show that the company has plenty of resources, boosting investor confidence.
Traditionally, companies with high levels of stock buybacks have outperformed the general market. The S&P 500 Buyback Index, which measures the top 100 stocks with the highest buyback ratios in the S&P 500, has a total return of 15.59% over the past three years compared to 11.95% over the same period for the S&P 500 alone.
UNH PE Ratio data by YCharts. PEG = price/earnings-to-growth.
A solid deal, but not a deep discount
Even with all of UnitedHealth Group's advantages, it could still be argued that the stock is a bit overpriced. Looking at its price-to-earnings ratio (P/E), the company trades at around 22 times earnings. While that's lower than the P/E of a typical healthcare stock, it's higher than those of other large healthcare insurers such as Humana or Elevance Health.
However, when you look at the trio's price/earnings-to-growth (PEG) ratio, which factors in a company's growth, UnitedHealth Group is the best buy of the bunch because of its superior growth rate.
