Humana Raises Dividend By 38%, But Its Scant Payout Ratio And Low Yield Make The Firm Unattractive

| About: Humana Inc. (HUM)

Summary

The healthcare firm has a scant payout ratio of less than 15%.

The firm trades at 19.09 times 2017 earnings, a big premium to the market.

The failed combination with Aetna makes the company a more risky investment.

Humana (NYSE:HUM) is one of the largest healthcare insurance companies in the United States. The firm is well-known for its group, individual, and Medicare Advantage insurance programs. The healthcare giant has a large exposure to government-run healthcare plans, with nearly 75% of customers in Medicaid, Medicare, or additional government commercial plans. It also offers additional services including home-based service care, pharmacy solutions and clinical offerings. Humana is based in Louisville, Kentucky and was founded in 1961.

The company has an impressive growth record over the past decade of expanding its key market within Medicare and Medicaid. Its Medicare Advantage plans are among the most popular among competitors. Even with the cost of running these major programs, Humana has been able to maintain its profitability and earnings growth through rapid subscriber growth.

But Humana's management team realized last year that the long-term growth prospects would be much better with the combination with Aetna. With the combination now terminated, Humana suffers from a high valuation with mixed growth prospects. The combination with Aetna could have diversified the firm's operations away from Medicare Advantage and allowed the firm to benefit from reduced costs. Alone, Humana may struggle in the next decade to keep up the same growth rate as the Affordable Care Act undergoes repeal or reform. Additionally, the high rates the company receives from the government may be pressured under the new administration.

For dividend investors, the yield is below 1%, well below the 1.6% yield the firm offered when it traded at a much lower price in late 2012. The healthcare firm also has a scant payout ratio, even given the latest dividend increase. It also trades at an elevated price/sales ratio of 0.55, more than double that of the historical trading low. Trading at $208.14, the firm trades at 19.09 times 2017 earnings, a big premium to the market. Only a handful of firms within the healthcare sector trade at a higher valuation. Dividend growth investors would be much better off considering those higher yielding firms, i.e. PFE, that trade at much better valuations, but still offer solid annual dividend increases.

Dividend Update;

After years of incremental dividend improvement, Humana's dividend was increased by a remarkable 38%. Its overall yield is 0.78%. The firm started paying a dividend in 2011. Humana has maintained an impressive three-year growth rate of dividends of 15.4 percent, primarily due to its most recent increase. Humana currently ranks 4th in dividend yield within the large-cap healthcare plans category. The quarterly dividend for the April payment will be $0.40 versus the prior year rate of $0.29 per share.

The dividend will be paid at the new higher rate on April 28, 2017, to shareholders of record at close of business on March 31, 2017. Humana Inc. is currently priced at $208.14. Listed in the table below are the quarterly dividend payments since 2011.

Date Quarterly Dividend
3/31/2017 0.4
1/10/2017 0.29
10/11/2016 0.29
6/28/2016 0.29
3/29/2016 0.29
12/28/2015 0.29
9/28/2015 0.29
6/26/2015 0.29
3/27/2015 0.28
12/29/2014 0.28
9/26/2014 0.28
6/26/2014 0.28
3/27/2014 0.27
12/27/2013 0.27
9/26/2013 0.27
6/26/2013 0.27
3/26/2013 0.26
12/27/2012 0.26
9/26/2012 0.26
6/27/2012 0.26
3/28/2012 0.25
12/28/2011 0.25
9/28/2011 0.25
6/28/2011 0.25

Latest Earnings Analysis:

Humana issued its earnings data on February 8th. The company reported $2.09 EPS for the Q4 quarter, topping the consensus estimate of $2.06 by $0.03. For full year 2016, earnings per share came in at an impressive $9.57, growth of nearly 18% year-over-year. Revenues inched up just up slightly, at 0.8% year-over-year to $13.46 billion for Q4. This was below most estimates. For full year 2016, the company reported total revenue of $54.96 billion. This was nearly flat from 2015's full-year results.

Humana's medical loss ratio, also known as the consolidated benefit ratio or the percentage of expenses against premium revenues, came in at just over 81% in Q4. This assisted profits as it came in below last year's results by over 300 basis points, as the firm had fewer claims. Humana's government retail segment listed a revenue increase of 2% from last year. Much of this gain was driven by increased membership. For its group healthcare plan division, the firm's revenue dropped by over 2% to $1.8 billion. The group was negatively affected by declining membership.

Within the healthcare services segment, total revenues were $6.3 billion, an impressive rise of 6% on a year-over-year basis. The star within this division was its mail order pharmacy business. Humana continues to maintain a solid balance sheet with cash and equivalents at just over $2 billion. The firm maintains a solid investment grade credit rating as well. Humana paid out dividends of nearly $45 million in the quarter. For the year, payouts to shareholders accounted for $172 million. With the mutual termination of the deal with Aetna, Humana will also receive a cash breakup fee of $1 billion, or $630 million after taxes.

The firm made several announcements in mid-February, including offering positive guidance for full-year 2017 earnings per share. Humana guided earnings per share at an adjusted range of $10.80 to $11.00. This would result in a 14% increase in earnings from 2016. The healthcare company also plans to exit its individual commercial business in the healthcare exchange market for 2018. This was due to Humana witnessing an unbalanced risk pool, where claims were becoming more prevalent with more sick patients signing up. It currently offers services for clients in 11 states. The firm also announced a new share repurchase authorization, which was on hold after the merger plans were initiated, for $1.5 billion in share buybacks. The large dividend increase was also announced, of $1.60 a share.

2016 2015 2014 2013 2012
Earnings per Share $9.57 $8.44 $7.36 $7.73 $7.47
Annual Dividend $1.17 $1.15 $1.10 $1.07 $1.01
Payout Ratio 12.22% 13.63% 14.95% 13.84% 13.52%
Earnings per Share 2017 (projected) $10.90
Dividend $1.60
Payout Ratio 14.67%

Source: Humana

Positives;

  • Humana has paid out a dividend consecutively for the past 6 years.
  • Humana maintains an investment grade rating of BBB+.
  • Humana has maintained a three-year growth rate of dividends of 15.3 percent.
  • Humana maintains a beta of 0.85, lower than the average company.

Negatives;

  • Humana's dividend yield is below that of the S&P 500 Index.
  • Humana's current dividend yield (0.78%) is below its five-year average historical dividend yield.
  • Humana is trading above its ten-year average price/sales (P/S) ratio and at an elevated P/E ratio.
  • Humana maintains a low payout ratio.

Quantitative Analysis of Humana is based upon our five key criteria for the Top 100 list, which include;

Category Value Score
Dividend Yield 0.78% 395
Dividend Growth (3-6 year avg) 15.3% 129
Forward P/E 19.09 151
S&P Financial Rating BBB+ 160
Beta 0.85 75
Total Score Overvalued 910
% Yield 3 Year Div. Growth Rate 6 Year Div. Growth Rate SPS 2016 P/S Ratio 10 yr P/S Low 10 yr P/S High 5 yr low Yield % 5 yr max Yield %
0.78% 15.3% 15.2% 372.85 0.55 0.20 0.60 0.52% 1.61%

Based on Humana's failed combination with Aetna, high exposure to government based plans, scant payout ratio, below average yield, high P/S & P/E ratios, Humana does not qualify as one of my Top 100 Dividend Stocks.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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