United Healthcare — A Full Analysis

United Healthcare (UNH) is the largest health insurer in the United States, here's why I think it might be a great pick for the next decade.

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United Healthcare (UNH)

Highlights

• United Healthcare’s business is comprised of 2 segments: United Healthcare and Optum

• Dividend Growth has been plentiful (15.94% raise in 2021 alone)

• UNH is one of my highest conviction holdings with huge tailwinds coming from the Optum division

Thesis

United Healthcare (UNH) is the largest health insurer in the United States. With its extensive customer base, diversified business segments, constant demand for its products, and growing Optum business segment, United Healthcare is poised to be one of the next decade’s best performing stocks. To top it off, it has rewarded investors handsomely with phenomenal dividend growth.

Recent News

• UnitedHealthcare and Optum Donate $205,000 to Support Eastern Kentucky Communities Devastated by Recent Flooding

• UnitedHealthcare Donates $11 Million to Nonprofits in 11 States

• Optum to Offer Lower-Cost Insulin for Uninsured People Living With Diabetes on Optum Store

Positives

It’s important to understand that United Healthcare’s business is comprised of 2 segments: United Healthcare and Optum. I’ll focus on its core business United Healthcare first. United Healthcare’s goal is to offer a full range of health benefits, enable affordable coverage, simplify the health care experience and deliver access to high-quality care. Within this business segment lies 4 divisions:

• UnitedHealthcare Employer and Individual - provides health benefit plans and services for large national employers (26 million members)

• UnitedHealthcare Medicare and Retirement - provides health and well-being services to individuals age 65 and older (13 million members)

• UnitedHealthcare Community and State - serves state programs that care for the economically disadvantaged, the medically underserved, and people without the benefit of employer-funded health care coverage, in exchange for a monthly premium per member from the state program (7.7 million members).

• UnitedHealthcare Global - serves people with medical benefits, residing principally in Brazil, Chile, Columbia, and Peru but also in more than 150 other countries (7.5 million members).

United Healthcare serves a diversified, worldwide customer base and is the largest insurer in the U.S. with 12% of the total market share.

It’s also the most profitable healthcare company, with it’s most recent quarterly report not only meeting but exceeding expectations. Some highlights include:

• Revenues of $80.3 Billion Grew 13% Year-Over-Year, with Double-Digit Growth at both Optum and UnitedHealthcare

• Earnings from Operations were $7.1 Billion, Growth of 19% Year-Over-Year

• Cash Flows from Operations were $6.9 Billion, 1.3x Net Income

• Earnings were $5.34 Per Share, Adjusted Earnings $5.57 Per Share

United Healthcare’s care network is also the most extensive. They boast over 1.3 million physicians and healthcare professionals, as well as more than 6,500 hospitals.

As for the Optum side of the business, here’s where I think the bulk of growth will come from. Optum’s goal is to deliver care aided by technology and data & empower people, partners and providers with the guidance and tools they need to achieve better health. Optum serves customers through 3 segments:

Optum Health

Optum Health provides care directly through local medical groups and ambulatory care systems, including primary, specialty, urgent and surgical care to 100 million consumers. This business also provides products and services that engage people in their health and help manage chronic, complex and behavioral health needs. Customers include employers, health systems, government and health plans.

Optum Insight

Optum Insight provides data, analytics, research, consulting, technology and managed services solutions to hospitals, physicians, health plans, governments and life sciences companies. This business helps customers reduce administrative costs, meet compliance mandates, improve clinical performance and transform operations.

Optum Rx

Optum Rx offers a full spectrum of pharmacy care services that are making drugs more affordable and creating a better experience for consumers, filling roughly 1.3 billion adjusted scripts annually. Optum Rx solutions are rooted in evidence-based clinical guidelines. This business makes health care more affordable by helping people find the medications they need at the lowest price, while helping benefit sponsors pay the lowest net cost.

Optum serves 127 million individuals, 90% of U.S. hospitals and 90% of Fortune 100 employees. Talk about a market!

The results from just the Optum segment in the latest earnings report are staggering:

Lastly, United Healthcare has one of the most bulletproof balance sheets around. Its latest earnings report showed $27.96 billion in cash which coupled with its other assets brings its total assets to $68.36 billion. Its liabilities total $88.7 billion, so it could potentially pay almost all of that off and with the quarters they’ve been having, they could be debt free if that became a priority.

Negatives

At this point you’re probably wondering if there are any negatives to this business.

United Healthcare is about as smooth of an operation I’ve came across while researching companies. Still, every company has to have some negatives or potential headwinds.

The first potential headwind I see is a change in governmental policy. Today the U.S. is a private healthcare system, and if you want health insurance, you have to pay one of the big players. This may not be the case forever though. There may be a future where the U.S. offers a public healthcare option, and UNH would lose a percentage of its business as a result.

The second potential headwind I see is the inevitable increase in data management spending. While I believe their move into healthcare data is a positive, they’ll need to spend top dollar to make sure that sensitive health data is secure. A data hack and subsequent lawsuit could potentially be devastating to the company’s financials and image. With only a few big players in the data protection industry, those companies can almost name their price. While not a major thesis-breaking concern, this trend in spending is something I’ll be watching in the future.

The last negative I see is that United Healthcare operates in a highly regulated environment. This means that they have to spend tons of money to make sure they remain compliant to Federal, State, and Local regulations. Failure to do so may cause United Healthcare to pay steep fines and will tarnish their reputation.

The Dividend Breakdown

For those that don’t know, I mainly use 3 metrics to assess the quality of a company’s dividend. The first is the Dividend Growth Rate, which I use to assess the company’s ability to raise dividends and combat inflation. When assessing the Dividend Growth Rate, I look at the 10 Year Compound Annual Growth Rate (CAGR) because it’s usually the longest-term data readily available and more indicative of long-term company trends. The second metric I use is the Dividend Payout Ratio, which tells me how much of the company’s profits are going to shareholders. The Dividend Payout Ratio also shows me how much room a company has to grow its dividend before it becomes unstable. The last dividend metric I use is Dividend Yield. Dividend Yield tells me how much “bang for my buck” I get as a shareholder. Yield isn’t everything, but it’s nice to see how much money I’ll get back as an investor in the next quarter.

With that being said, I’ve developed a scoring method for rating a company’s dividends. It consists of the previously mentioned metrics scored out of 5 and each score is multiplied and weighted by importance. The highest possible score a company can receive is a 31, and members of the Dividend Aristocrats club will receive an extra point for their long-standing history of reliable dividend raises. Each metric has its own criteria which I’ll share below:

• Dividend Growth Ratio is the most important metric for me, so scores will be multiplied by x3

• Dividend Growth Ratio of 0%-5% is a 1, 5%-7% is a 2, 7%-9% is a 3, 9%-12% is a 4 and a rate of more than 12% is a 5

• Dividend Payout Ratio is the second most important metric, so scores will be multiplied by x2

• Dividend Payout Ratio of 95% or more is a 1, 75%-95% is a 2, 55%-75% is a 3, 35%-55% is a 4 and a rate of less than 35% is a 5

• Dividend Yield is the least important metric of the 3, so scores will be multiplied x1

• Dividend Yield of 0%-1.5% is a 1, 1.5%-2.5% is a 2, 2.5%-3.5% is a 3, 3.5%-4.5% is a 4 and a rate of more than 4.5% is a 5

UNH scores are shown below:

UNH's 10-year Dividend Growth Rate (CAGR) is 23.97%, obliterating the Healthcare sector median of 7.18%. Their Dividend Payout Ratio is 27.58%, well within the margin of safety with room to comfortably grow their dividend over time. Their dividend yield is 1.21%, right around its 4-year average yield of 1.37%. Compared to the median yield of 1.17% in the Healthcare sector, UNH’s 4-year yield is slightly higher. Lastly, UNH has been paying a dividend for 19 years and has raised it consecutively for the last 12 years, making it a Dividend Contender. Overall, United Healthcare scored 26/31 points, proving that the company has a fantastic dividend. It is worth mentioning that UNH raised its dividend by 15.94% in 2021, and I'm optimistic that this trend of healthy increases will continue.

Final Thoughts

Overall, United Healthcare is an incredibly sound business, and I foresee holding their stock for a decade, minimum.

Their insurance business has an impressive member base spanning the globe and a vast network of physicians and medical professionals.

Optum is an insanely strong tailwind in my opinion. It ties together the insurance side of the business with doctors visits, prescriptions, health data and analytics, creating an inter-woven healthcare ecosystem that gives them a wide moat.

Also, investing in UNH gives you exposure to insurance, healthcare, hospitals, prescriptions, data, and more in just 1 buy. Very sneakily diversified.

United Healthcare isn’t a name that’s talked about with the Apples and Microsofts of the world, but it deserves a spot in that conversation as much as anyone else.

I’ll accumulate dips under $477 and UNH will remain one of my top 5 positions.

What do you think about United Healthcare? Will it find a spot in your portfolio? Do you already own it? Hit me up on Twitter @DrDividend47 or email me at [email protected] & let's chat!

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