Over the past year, America's typically predictable health insurance industry has been exciting in ways that investors hardly appreciate. In a nutshell, healthcare expenses have been outpacing the monthly premiums that insurers collect.
Rising utilization rates have affected the entire industry, but one company has been particularly bad at anticipating the trend. On May 13, UnitedHealth Group (UNH -11.14%) suspended its 2025 outlook and announced the immediate departure of CEO Andrew Witty.
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What happened to UnitedHealth stock?
On May 15, shares of America's leading health insurance benefits manager fell to a level 59% below the peak they reached about six months earlier.
The stock has collapsed because nobody seems to know just how bad utilization rates have become. When UnitedHealth Group reported first-quarter results on April 17, management adjusted its 2025 earnings outlook from a range between $28.15 and $28.65 per share down to a range between $24.65 and $25.25 per share.
Management teams can and often do revise guidance from quarter to quarter. However, you almost never see a well-established business like UnitedHealth Group walk back guidance less than a month after providing it.
In an unusual conference call on May 13, UnitedHealth suspended earnings guidance without providing any revised figures. The company's President and CFO John Rex highlighted the main issues that are squeezing profit margins.
First, the health status of new members isn't as robust as hoped. In April, the company said it expected to serve 650,000 new value-based care patients. Rex's remark suggests these patients are getting a lot more value than UnitedHealth had intended.
Rex also complained that utilization within the company's Medicare Advantage program had accelerated even further than previously anticipated. He didn't go into specifics but said the trend is broadening to other areas.
Reasons to buy now
We don't know how low the next earnings-guidance revision will go but can be fairly confident that UnitedHealth Group's bottom line will return to growth over the next few years. It mis-priced premiums for 2025, but its customers can expect a bigger monthly bill in 2026. Management is already incorporating the higher costs it's been experiencing into 2026 Medicare Advantage bids that are due in June.
Most Americans don't get to decide which insurance company receives over $1,000 per month in premiums from them and their employers. For employers who do have options, though, UnitedHealth's integrated-care strategy can offer savings that its smaller, less-integrated competitors can't match.
In 2023, United Health's Optum Health employed around 10% of America's physicians. It's been a while since management shared this figure, but it's likely the largest employer of physicians in the country. Optum RX, its pharmacy benefits management business, is one of the three largest, which gives it a very strong position from which to negotiate.
Shares of UnitedHealth Group have been beaten down to the ultra-low valuation of just 10.7 times trailing earnings. Unfortunately, Earnings could go down to a shockingly low figure this year, but this likely isn't a permanent situation. Passing heightened-care expenses to consumers by raising premiums and deductibles is nothing new for this company.
With its stock price severely depressed, UnitedHealth Group's typically minuscule dividend yield has risen to 3.3% at recent prices. The company raised its payout by 320% over the past decade.
Dividend payout raises in 2025 and 2026 might be smaller than usual, but maintaining the payout probably won't be an issue. Even if 2025 earnings shrink by half, there would be more-than-enough profit to support a dividend currently set at an annualized $8.40 per share.
Management didn't provide forward-looking guidance for 2025 but believes it can reliably generate earnings growth at a double-digit percentage over the long run. Even if earnings only creep forward by a mid-single-digit percentage, an investment at these beaten-down prices could lead to market-beating gains for patient investors.
