When researching investment opportunities, I look for companies that have a dominant market share while trading at a below market multiple. Along with the above criteria return of profits to shareholders via dividends and share buybacks is a must. United Healthcare (NYSE:UNH) neatly falls into the above criteria, especially in light of its recent announcement of a significant bump in its dividend rate. In the article below I will make the investment case for UNH.
Revenue in millions
Earnings per share
Dividends per share
Shares outstanding in millions
UNH has successfully grown its revenue over 26% from 2009 to 2102. Consistent revenue growth is tantamount for rising earnings which have grown over 60% in the same time frame. Clearly, UNH has been successful in selling its products into the marketplace and gaining share. In light of this stellar performance the shares trade at a trailing p/e ratio of less than 12 which is far less than a market multiple.
In my opinion the main reason for the underwhelming P/E is the fear of the upcoming implementation of Obamacare. There is fear and significant uncertainty involved in the rollout of the new law. One of the fears is the government will eventually force everyone into a single payer system by making reimbursement levels so unappealing that the insurance companies will drop out altogether. I don't share this view. Instead I profess an opposite view. The rollout will be similar to what was witnessed with the implementation of the part D program. I don't foresee the process as being smooth and orderly as evidenced by the majority of the states refusing to set up insurance exchanges as an example. Instead, companies such as UNH will compete in the areas where profit can be made. In these areas you will see the best care given, however it will cost money. I believe the vast majority will see this and opt for superior care. An investor in UNH will have to be willing to accept the uncertainty caused by the new laws implementation. If there wasn't as much uncertainty involved the shares in my opinion would trade at a premium to the market.
Dividend growth has been exceptional in the past five years at UNH. Starting in 2009, with a yearly rate of 3 cents per share the company has adopted a more shareholder friendly stance to dividend payments. In 2010, the company switched to a quarterly payment with yearly bumps announced in June. The recent announcement jumped the quarterly rate from 21.25 to 28 cents per share. At a current quote of $62.57 the new rate works out to an annual rate of roughly 1.8%. The company has ample room to continue to raise the rate in the future as the payout is roughly 20% of net profits.
The company also announced an increase in the number of outstanding shares it plans to repurchase. UNH will repurchase 110 million shares over time from the 63 million outstanding. In my opinion share buybacks are an excellent, tax efficient way to reward patient long-term shareholders. The following quote attributed to Stephen Hemsley, CEO of UNH, sums up the company's philosophy on rewarding shareholders.
"Since 2009, United Healthcare has consistently taken market share, having grown to serve 4.5 million more people in the U.S., while positioning to serve another 4.5 million people in Brazil. Optum has been formed, aligned, rebase lined and on its way to doubling its 2011 earnings over a 4-year period, significantly increasing its relative contribution to our overall earnings.
At the UnitedHealth Group level, our financial performance has been distinctive in a recessionary environment. Since 2009, revenues have increased $23.5 billion or 27%, operating earnings are up by nearly $3 billion or 46% and net earnings have grown by more than $2 per share from a base of $3.24 per share, an 18% compound growth rate. We have generated cumulative cash flows from operations of more than $20 billion over those past 3 years. We dedicated a portion of this amount to repurchase nearly 200 million shares at an average price of about $43.50 per share, reducing our weighted average shares outstanding by more than 11%." Transcript courtesy of Seeking Alpha.
To summarize, I believe an investment in UNH offers a compelling risk reward to the patient long-term investor. The company is superbly managed and is aggressively rewarding shareholders via dividends and share buybacks. There is some uncertainty involved in purchasing the shares. However without the uncertainty the shares would be trading at a market premium. Thank you for reading and I look forward to your comments.
Disclosure: I am long UNH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Thank you for reading the article. The article is for informational purposes only.