In late September, UnitedHealth Group (UNH -Free UnitedHealth Stock Report) joined the Dow-30 family as the newest member, replacing Kraft Foods (KRFT), following the food giant’s recent split into two entities. Its entrance into the Index means mutual funds that track the Dow-30 components will add positions of UnitedHealth to their portfolios. The newcomer’s allure doesn’t end there. We discuss below what gives this issue special appeal.
Founded in 1977 by Dr. Paul Ellwood, a health policy advocate, and entrepreneur Richard Burke, UnitedHealth Group originally functioned as the parent entity of Charter Med Inc., which focused on providing health coverage options for consumers. A couple of years later, it introduced its first network-based health plan for seniors and began offering private-market alternatives for Medicare, though the company operated primarily as a healthcare technology specialist through 1984, when it went public. Over the next two-plus decades, management would make a number of strategic acquisitions that would essentially change, expand and diversify the scope of UNH’s business, transforming the company into the healthcare giant it is today.
Among the most significant moves it made was in the mid-1990s, when it sold its pharmacy benefits management business, which it had launched in the late ‘80s. UnitedHealth Group, instead, purchased The MentraHealth Companies, an entity formed by the group healthcare operations of The Travelers Insurance Company and Metropolitan Life Insurance Company for $1.65 billion. This deal put the company on the path to becoming the largest health insurance operator in the U.S. Its next major move came in 2004, when it acquired Oxford Health, after which another round of key acquisitions were made over the last five years. In its present-day configuration, UnitedHealth Group operates through two main segments: UnitedHealthcare, which offers network-based healthcare benefits, and Optum, which provides information and technology-based health services. (Read our Dow-30 Profile for a more in-depth discussion of UnitedHealth Group’s history.)
With that in mind, we note that a brief business description on UnitedHealth Group, which includes such information as major recent acquisitions, can be found in the business Blurb section, located at the center of the Value Line page. UnitedHealth Group’s fascinating background is far from the only thing that makes this Dow-30 component a stock worth including in a well-balanced portfolio.
Granted, the issue is just an average (3) selection for Timeliness (found in the Ranks box at the top left-hand corner of the Value Line page), but there are other features that give UNH appeal. Remember, Timeliness measures a stock’s price and earnings momentum compared to the performance of the broader market, and it ranges from 1 (Highest) to 5 (Lowest).. For one thing, the stock pays a decent dividend, as suggested by the dividend yield (in the Top Label), which tells the expected return from cash distributions on the equity over the coming 12 months. Specific dividend amounts and increases that have been paid can be found in the Statistical Array (middle section of the page) and in the Quarterly Dividend box (bottom left-hand corner).
What’s more, the Projections box, just beneath the Ranks box, indicates that long-term appreciation potential is substantial here, making it a good choice for the more patient investor. Specifically, we see the percentage price gains expected over the coming three to five years; these take into account the current stock price (shown on the Top Label) and the High and Low Price range estimated by the analyst over the long term. In the same box, the annual total return shows the estimated rate of return including both price appreciation and prospective dividends to be paid through the 3- to 5-year span. Again, from those numbers, investors stand to be well-compensated, with some income to be made. And based on the P/E ratio (in the Top Label), UNH stock doesn’t seem overpriced. The valuation compares rather favorably, versus its historical and projected P/E ratios shown in the array.
The risk profile is fairly solid here, too. In fact, the Safety rank of 2 (in the Ranks box) implies UNH shares have less risk, and thus are safer, than the average issue under Value Line’s review. Like Timeliness, the rank ranges from 1 (Highest) to 5 (Lowest). Also in the Ranks box, the Beta coefficient shows that the stock’s volatility is on par with that of the market (where 1.00 equals the market). (Note that a figure lower than 1.00 means the equity is less volatile, while a number that is higher indicates greater volatility than the overall market.) This is further supported by some of the components located in the Ratings box in the lower right-hand section. While Stock Price Stability and Price Growth Persistence are not at the top of the range, the insurer gets near-perfect marks for Financial Strength (A+) and Earnings Predictability (95 out of 100).
All in all, UnitedHealth Group should do relatively well in the years ahead. Indeed, analyst Erik Manning expects revenues, comprised primarily of health insurance premiums, and earnings per share (found in the Quarterly Boxes at the lower left corner and in the Statistical Array) to rise, reaching new heights by mid-decade. This assumes the medical loss ratio, or medical costs as a percentage of premiums, remains strong, as explained in the Commentary. The metric, highlighted in the business Blurb, was just under 81% in 2011. The Annual Rates box (left side of the page) suggests low double-digit growth for most key operating items in the coming years. As Erik Manning points out in the Commentary, the insurer is positioned to excel, despite the impending reform under Obamacare that is likely to impact the health insurance industry as a whole.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.