After sifting through countless small-cap and mid-cap stocks to rule them all over the past 20 weeks, the time has finally come to tackle large-cap companies. Large caps will usually not offer the same torrid growth pace that can be found with small caps, but their businesses are often well-established globally, with a rich history of profitability. This global presence gives large caps a distinctiveness that small and mid-caps usually don't have -- namely, that many pay a dividend and can essentially run on autopilot in your portfolio.
For reference, here are the previous six choices:
Today I'm going to focus on the nation's largest health benefits company by membership, WellPoint (NYSE: WLP).
What it does
WellPoint, through its exclusive Blue Cross and Blue Shield Association networks, operates as a health benefits company in the U.S., providing services to business, individual, Medicaid, and senior markets. As of its most recent quarter, WellPoint claimed 34.2 million medical members and 70 million members across its partner networks.
How it stacks up
Up until now I've only been verbally supportive of WellPoint on Motley Fool CAPS, but I feel the facts will speak for themselves.
Being the largest health benefits company by membership comes with perks. As the exclusive provider of Blue Cross and Blue Shield, the most recognizable name in health care, WellPoint is able to keep its closest rivals, UnitedHealth Group (NYSE: UNH), CIGNA (NYSE: CI), and Aetna (NYSE: AET), at bay.
Although recent earnings results have been mixed -- membership is growing, but Medicare Advantage expenses are rising -- WellPoint takes care of all of the intangibles that you'd expect from a stable growth story. Last year, the company repurchased an amazing $4.4 billion worth of its own shares. This signifies faith in the company's long-term strategy and supports the theory that management feels its shares are undervalued; with it trading right at book value, I tend to agree. Shareholders certainly aren't complaining about the recently implemented $1 annual dividend, either.
What WellPoint lacks in growth rate, it far makes up for in value and stability. Let's take a closer look at how it stacks up to some of its peers.
|
Company |
Forward P/E |
Price/Book |
Price/Cash Flow |
Dividend Yield |
|---|---|---|---|---|
|
WellPoint |
8.3 |
1.0 |
7.3 |
1.57% |
|
UnitedHealth Group |
9.9 |
1.9 |
7.8 |
1.38% |
|
CIGNA |
7.5 |
1.5 |
7.4 |
0.10% |
|
Aetna |
8.0 |
1.4 |
9.9 |
1.58% |
|
Humana (NYSE: HUM) |
9.9 |
1.7 |
6.2 |
1.31% |
|
Coventry Health Care (NYSE: CVH) |
8.7 |
1.0 |
8.2 |
N/A |
Source: Morningstar.
Like other companies previously highlighted in this series, one factor that stands out is the overall "cheapness" of the sector. With all six companies trading at single-digit forward earnings multiples, we need to look at other metrics to single out why WellPoint is king. Coventry's lack of a dividend and CIGNA's poor excuse for one easily take them out of the running. Aetna's rich price-to-cash flow, and Humana's and UnitedHealth's higher price-to-book make WellPoint simply a cheaper alternative.
How it could make you money
WellPoint could be in line for a huge increase in dividends over the coming years. Since it only recently began paying a dividend, there's no growth history to judge, but I think it'd be foolish (with a small "f") to assume that its payout ratio will remain as low as its current payout of 7%. Although WellPoint has $9.7 billion in debt and recently agreed to acquire CareMore for $800 million, the company has $19.6 billion in cash. I expect WellPoint to pay down some of that debt, but shareholders could be in line for significant dividend increases.
Another thing you'll want to keep in mind is WellPoint's value as a hedge investment. In both good and bad economies, people are going to need to see doctors. Even though slower economies do produce fewer trips to the doctor, the effect on health benefits companies is negligible. As one of the fastest-growing sectors in terms of demand, health-care companies should be a boon for your portfolio, and WellPoint could be the medicine you need.
What's your take on WellPoint? Share your thoughts in the comments section below and consider adding WellPoint to your personalized stock-tracking watchlist.
