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The Dow's Best Health Care Stock: UnitedHealth

By Dan Carroll - Mar 7, 2013 at 3:30PM

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Is this big insurer the top blue chip health care pick for your money?

Investing in the health care sector isn't easy. Where do you start out? From medical device companies to big pharma to small biotech firms bristling with boom-or-bust prospects, it's tough for investors new to this sector to understand the intricacies unique to health care. Fortunately, there's an easy place to look for blue-chip, tried-and-true stocks: the Dow Jones Industrial Average (^DJI -0.86%).

Four big-time health care stocks call the Dow home, but which one is the best pick for your money? In this five-part series, we'll take an in-depth into why each health care stock on the Dow is worth investing in -- and in the final installment, we'll select a winner. Yesterday we dove into the present and future of big pharma's Merck; in part four of the series, let's take a look at new Dow member and health insurance giant UnitedHealth Group (UNH 0.57%).

The basics and growth of UnitedHealth
This big insurer hasn't had the same sort of success in the markets recently as the other Dow health care stocks. Over the past 52 weeks, shares of UnitedHealth have fallen around 1%; the past month has seen a 6% loss alone.

UnitedHealth's also not much of a dividend star, either. The company's 1.6% dividend yield ranks below the Dow Jones average and is the smallest of any of the index's four health care members. While UnitedHealth's relatively tiny payout ratio of 15% indicates plenty of room for the company to grow that dividend, income investors have plenty of more rewarding options on the Dow.

However, the company's business has continued to surge lately. The health care giant has continued to increase its lead over its competition recently, growing its already-substantial subscription base more than its leading competitors in 2012. The insurance industry is one where size matters; with more than 83 million customers at the end of last year, UnitedHealth's growth will keep it on top.

For all of UnitedHealth's power in the U.S., however, it's the company's moves abroad that demand investor attention going forward. Its purchase of Brazilian health care colossus  Amil last year -- a firm that dominates in a nation where a rising middle class is boosting the fortunes of private insurers -- shows UnitedHealth's commitment to expanding globally. The company already boasts partnerships in India and the Middle East -- strong, growing regions that should only help UnitedHealth's future.

While a growing subscriber base and positive geographic trends point to good things in UnitedHealth's future, one key change could make all the difference: Obamacare.

A future in flux
Any questions surrounding UnitedHealth -- and the health insurance industry as a whole -- have to begin with Obamacare. The new law of the land, with many of its biggest changes such as health care insurance exchanges coming into effect next year, will significantly alter the landscape of the insurance industry – for better and for worse.

UnitedHealth has aimed to join a few of these exchanges when they first come into services. I'd expect the company to end up on the low end of that range: UnitedHealth should test the waters gingerly before diving in, as the ultimate effects of Obamacare aren't fully known yet. Still, by committing to a number of exchanges early in this new world of health insurance, UnitedHealth's signing on to the new policy with a show of faith that will please policy advocates -- and likely, businesses and consumers. That positive PR could go a long way if Obamacare succeeds; furthermore, I doubt UnitedHealth will frown at the influx of new customers.

Health care reform isn't all good for UnitedHealth's future, however. New Obamacare requirements, particularly ones that mandate insurers can't turn away buyers and ones that require firms to cover many health care services that customers might not otherwise pay for, will drive premiums up -- in some cases, way up. The industry's worried: Mark Bertolini, CEO of UnitedHealth rival Aetna (AET), the third-largest health insurer in the U.S., has expressed that premiums in some markets could  jump by up to 100% -- something he notes as "a big concern."

Why's that a concern? With a relatively paltry penalty for individuals and companies opting out of Obamacare, there's a chance some future health care customers (particularly younger, healthier customers -- who now can't be turned away) at UnitedHealth and other insurers could purchase insurance when sick and in need and then opt out and pay the government penalty when healthy, looking to avoid hefty premiums. That would certainly drive up the cost of doing business, and while I believe UnitedHealth will find a way to outmaneuver that kind of gamesmanship in coming years, investors should keep a close eye on how premiums grow across the U.S. insurance industry in the near future.

Set for stability
Ultimately, UnitedHealth's size and position atop the health insurance industry should keep it on top despite the new Obamacare-inclusive world. This is a great pick for investors craving stability, even with its lackluster dividend turning off income investors. Is UnitedHealth's spot at the top of its industry enough to make it the top health care stock in the Dow? Read on to tomorrow's series conclusion to find out.

Fool contributor Dan Carroll has no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

UnitedHealth Group Incorporated Stock Quote
UnitedHealth Group Incorporated
$548.32 (0.57%) $3.10
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$33,706.74 (-0.86%) $-292.30
Aetna Inc. Stock Quote
Aetna Inc.

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