UnitedHealth Group has managed to increase dividends for 10 years in a row. The company increased its quarterly dividend by 20% last week, to $1.08/share. I expect it to become a dividend achiever soon.
UnitedHealth really started growing distributions in 2009, which led to a rapid growth in annual distributions from 3 cents/share to $3.60/share. Long-term growth in dividends per share will likely match growth in earnings per share in the future. However, there is still some room for a little faster growth in dividends over the next 5 – 10 years, given the lower dividend payout ratio today.
UnitedHealth has managed to grow earnings per share by a factor of 6 over the past decade. Earnings grew from $2.40/share in 2008 to $12.19/share in 2018. Earnings per share were impacted briefly during the financial crisis in 2008, as they fell from 2007’s level of $3.42/share. However, they quickly recovered. The company is expected to earn $14.67/share in 2019.
The company’s share price has been declining, due to external risks. The possibility for a disruption of the existing healthcare model in the US could negatively impact profits. An increase in scrutiny on pharmacy benefits managers, which generate revenues based off pharmaceutical rebates can also be a drag on performance. There will be increased volatility as we head into the 2020 election, which may result in lower entry prices for investors. I do believe that the possibility of disruption is there, however the likelihood of it occurring are very low in my opinion. Changing the nation’s laws will be a challenge, as there is an army of lobbyists as well as a divided congress which cannot reach a compromise on anything. Ironically, UnitedHealth Group could benefit from increased government regulation in the healthcare market, as this will increase the number of participants, the volume of prescriptions and procedures being performed. In addition, it could still offer competitive managed care plans on top of government health insurance such as Medicare. Or alternatively, it could manage the Medicare for a portion of the population if it could do it in a smarter and more efficient way than what a government agency could accomplish.
The company offers health insurance, manages health insurance plans, offers pharmacy benefit management, as well as solutions to improve performance and deliver efficiencies. The integrated nature of its business model has given it excellent scale, which competitors such as CVS Health are trying to emulate. This integrated nature of providing health insurance and providing prescription benefits management leads to lower costs, and increases competitiveness and profits. For example, due to lower costs, UNH can offer lower premiums than its competitors for health insurance or for managing health plans.
Scale is important for Pharmacy Benefits Managers, since it allows them to extract lower prices from drug manufacturers due to huge volumes of prescriptions being filled. There are only three major PBM’s in the US that fill the majority of prescriptions in the country. Also having the know-how of filling a lot of prescriptions also improves scale and generates sufficient efficiencies to further result in lower costs. The more of a certain task you do, the better you get, and your efficiency and expertise improves dramatically.
The company has managed to reduce the number of shares outstanding over the past decade by a fifth. The number of shares outstanding decreased from 1.214 billion shares in 2008 to 983 million in 2018.
The dividend payout ratio increased from 1.25% in 2008 to 28.30% in 2018. A lower payout ratio is always a plus, because it provides an adequate margin of safety in case of short-term turbulence in earnings per share. In this case, it is possible that dividends can grow faster than earnings, through expanding the payout ratio to 40% - 50%.
Right now, I find UnitedHealth Group to be attractively valued at 16.80 times forward earnings and yields 1.75%.
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