- This company has delivered another beat and raise, precisely what it delivered last quarter.
- UNH has delivered 16 quarterly EPS beats in a row, though missed revenue estimates twice over the same 16 quarters.
- These steady beats show why UNH can continue to deliver dividend growth for investors.
- This idea was discussed in more depth with members of my private investing community, Cash Builder Opportunities. Learn More »
Written by Nick Ackerman
UnitedHealth Group (NYSE:UNH) is delivering results again. This stock has been providing earnings beats for several years now. Though revenue has come in shy on a couple of occasions, it is still on an impressive run. More impressively, they also guided higher for the full year 2021. That was after they had raised guidance last quarter.
Previously, they were targeting non-GAAP EPS of $18.10 to $18.60 for the year. That was an increase from the original expectation of $17.75 to $18.25. However, now this has been hiked to EPS of $18.65 to $18.90. This is well above where they initially anticipated being, and the anticipated low-end is coming in higher than the previous high-end. This is precisely what we want to see from this dividend growth machine.
I've called UNH boring in the past, and it continues to be just that. As a health insurance company, it certainly isn't in a "growth" field per se. Yet, these sorts of results are certainly exciting.
UNH Isn't Overvalued
The stock is headed higher on the back of these results as well, pushing the shares of the company to right near new all-time highs.
Despite that fact, the company isn't overly expensive considering the growth it has been delivering. If earnings come in at the midway point, we would see EPS of $18.65. Meaning that the forward P/E ratio would be around 22.72, as shown below. This might be over the current average of the last couple of years. Meaning if you believe in mean reversion, shares could fall further.
What I believe is propping UNH up - and the reason I think it isn't expensive - is that it is still anticipated to grow EPS quite materially next year. Being that they have a record of beating these estimates, the estimates might be pretty low in this case as well.
We are seeing the median analysts' estimate of EPS will come in at $21.73 next year. That's 16.5% over the estimated midpoint figure for 2021 that they provided. 2020 was a bit of a strange year for all companies. However, if we use the 2019 EPS figure of $15.11 for that year, then I believe we can see that type of growth is well within the achievable territory for this stock.
This all just means that the forward P/E is likely lower than what we see above. This would put it much closer to the average P/E ratio we have seen for shares historically.
(Source - Seeking Alpha)
Driving Continued Growth
All this growth isn't coming because they are sitting around idle. The leaders of this company have been engaged with acquisitions and further developing their platform. This is via the continued development of technology and AI. Optum is a large part of UNH and is called out as one of the key contributors to their higher guidance. There are several areas of the latest conference call that I'd like to point out that I believe show promise.
As a result of the progress at both Optum and UnitedHealthcare, we have increased our 2021 adjusted earnings outlook to a range of 1865 to 1890 per share. We continue to prioritize 3 things Andrew has discussed before which are foundational to the growth of our enterprise. First, unlocking the collaborative potential within Optum and UnitedHealthcare for the benefit of all. Second, further developing our technology in data science platform to aid patient care and experience and to help the system run better. Third, strengthening our consumer experience, capabilities, and values. I'll briefly highlight a couple of items for you.
Besides this continued organic growth that they continue to work on, the company is pending acquisition with Change Healthcare. They are anticipating a close in the first part of 2022. Though it isn't nailed down, they continue to deal with regulatory requests to get the deal done.
Before turning over the call to John, a quick word on our pending combination with Change Healthcare. We continue to work diligently to satisfy regulatory requests and now believe, based on our experience so far, the transaction should close in the first part of 2022. We are highly energized about the positive impact we can have working together with the exceptional change team. A team aligned with our mission and values and focused on delivering substantial benefits for the healthcare system.
Management believes that the Change platform will provide a complementary service with their Optum platform. That's important to note as it won't be cannibalizing itself.
Optum and Change Healthcare's capabilities fundamentally are complementary in distinct, because both companies already successfully serve health plans and state governments, care providers, and consumers in a highly competitive market. We believe this combination will make the healthcare system work better for everyone and bring exceptional value to those we serve.
Finally, regarding this potential acquisition is another significant point worth mentioning. They are guiding without this deal. That means it won't take this deal closing for them to hit their projections. It does mean that if they complete this as anticipated early next year, this should only benefit the company in once again delivering higher earnings.
So just in terms of the relates to change an impact, I just point out that we don't bring in acquisitions into our outlook until those close. So my commentary, doesn't anticipate change in there and we would look to bring that until it closes. When that is complete, we've no reason to expect that we wouldn't be trending along the same levels that we talked about prior.
The levels they were talking about prior would be delivering accretion of $0.20 to $0.50. Again here, given the track record of under-promising and over-delivering can probably put us closer to the higher end.
Of course, as a reminder, that deal for Change Healthcare (CHNG) was for $25.75 per share. It was announced back in January of this year. The share price of CHNG had originally popped but has sunk back quite a bit lower.
This potentially could signal that investors aren't so sure the deal could go through. This is rightfully so as the Department of Justice is reportedly considering a lawsuit to block the purchase. That being said, as we can see above, the deal going through isn't imperative to UNH's outlook.
A more considerable risk, in my opinion, is the political environment. Healthcare can generally be a great punching bag for politicians. Healthcare expenses in America are relatively more expensive than other wealthy countries around the globe. That makes it an easy target to rally supporters around greater regulation. More significant regulations could add more costs or potentially limit earnings potential for UNH. This is a perpetual risk that will never really go away; every couple of years, it is highlighted.
UNH Is A Low Dividend Yield, But High Growth Play
With UNH, you are looking at a forward yield of 1.35% based on the $5.80 annual dividend. This was raised earlier this year and now raises its dividend for 12 consecutive years. There are many other positions that one could invest in that could provide a significantly higher yield. However, UNH makes it up in the growth of the dividend.
(Source - Seeking Alpha)
The boost earlier this year was good for a 16% increase to shareholders. However, that was historically lower than the impressive 25.10% dividend CAGR over the last 10-years. It is also shy of the 5-year CAGR of 19.14% that it has delivered. With earnings growth set to continue as we dove into above, that should translate into continued dividend growth. This is in addition to the incredibly low dividend payout ratio of 30.79%.
This isn't the only form of UNH returning capital to shareholders. They are also a regular buyer of their own stock. This has served to reduce the shares outstanding over the last few years.
UNH continues to be a big winner. Shareholders have been rewarded via dividends, buybacks and appreciation of the shares. With the latest beat and raise again for this quarter, it would seem that the growth isn't over yet for this health insurance behemoth. They continue to invest in their platforms successfully and target accretive acquisitions where need be.
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Analyst’s Disclosure: I/we have a beneficial long position in the shares of UNH either through stock ownership, options, or other derivatives. 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.
This article was originally published to members of the Cash Builder Opportunities on October 17th, 2021.
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