Last month, I almost added UnitedHealth Group (UNH) to DTA’s Income Builder Portfolio, and I indicated that the nation’s leading health-insurance provider remained high on my watch list for our real-money, real-time Dividend Growth Investing endeavor.
Well, given that the only thing that has changed between then and now was UNH announcing a 20% dividend hike, I didn’t need a lot of convincing to go from watching to choosing.
Come Tuesday, June 11, I will execute a purchase order on Daily Trade Alert’s behalf for about $1,000 worth of UnitedHealth stock.
UNH will become the IBP’s 26th position, and our 4th company from the Health Care sector.
United We Don’t Really Stand
On April 12, Democratic presidential candidate Bernie Sanders tweeted out a warning to Steve Nelson, leader of UnitedHealth’s insurance division:
That, combined with rumblings from other politicians about curbing health-care costs, sent UNH stock down about 5%.
Shares recovered most of that the next session, and UNH appeared ready to take off on April 16 after the company announced the latest in its decade-long succession of earnings beats.
However, in addressing Sanders’ tweet later that day, UnitedHealth Group CEO David Wichmann opened the earnings call ominously:
The wholesale disruption of American health care being discussed in some of these proposals would surely jeopardize the relationship people have with their doctors, destabilize the nation’s health system, and limit the ability of clinicians to practice medicine at their best. And the inherent cost burden would surely have a severe impact on the economy and jobs – all without fundamentally increasing access to care.
The media and investors latched onto the words “wholesale disruption,” and despite the easy earnings beat, UNH fell 4% that day and another 2% on April 17, when it hit its 52-week low of $208.07.
Since then, though, investors have more or less come to their senses, and the UNH price has moved back over $240.
Given how divided Congress (and our entire nation) is, what are the chances that Medicare For All or some other new plan will ever get enacted to cause “the wholesale disruption of American health care”?
Still, enough politicians on both sides of the aisle are talking about curbing costs to make me careful about the stocks I select in this sector.
To that end, there are few (if any) more efficient money-making machines than UnitedHealth Group.
Take a look at this beautiful, two-decade FAST Graphs snapshot of UNH’s growth of earnings per share:
The red-circled area shows the only time in the entire span that EPS went down, and that was smack-dab in the middle of the second-worst financial crisis ever.
Notice how most of the increases (highlighted in yellow) were by double-digit percentages, including 28% just last year. And the blue-circled area shows that double-digit growth is expected well into the next decade.
UnitedHealth also has excellent returns on equity and invested capital, as the following graphic from Simply Safe Dividends shows.
Add in the fact that UNH carries very low debt, and this is the exact kind of business I like owning as a shareholder.
Although health insurance through UnitedHealthcare is what UNH is best-known for (and what angry pols like to tweet about), the company’s Optum division — led by OptumRx pharmacy benefits management and the OptumHealth care delivery segment — is also highly profitable and growing.
The company’s strength is reflected in the respect it gets from leading investment researchers and rating services.
Calling UNH a “wide moat” business with “exemplary” management, Morningstar has placed the company in its “Hare Portfolio” — which uses a “growth at a reasonable price” strategy to look for companies with above-average EPS growth whose stocks are trading at reasonable multiples of long-term earnings potential.
UnitedHealth is one of only 10 companies with a 1 “Safety” score on Value Line’s list of “Highest Growth Stocks,” and VL also has UNH in its model portfolio of “Stocks with Long-Term Price Growth Potential.”
In addition, UnitedHealth gets an A+ credit rating from Standard & Poor’s.
From 1990-2009, UNH paid a small annual dividend. In 2010, it joined the ranks of companies delivering quarterly dividends … and WOW! … they have grown as if super-charged.
The $4.14 annual figure in the above table takes into account the June 5 announcement of the 20% raise in the quarterly dividend from 90 cents per share to $1.08, effective with the next payment on June 25.
That’s some pretty amazing dividend growth — nearly 7-fold just since 2011. And with very low payout ratios, there’s plenty of room for more.
The aggressive growth helps make up for UNH’s relatively low yield of about 1.8%.
Wrapping Things Up
Of my previous 9 selections for the IBP since mid-February, 7 were companies the portfolio already owned.
That’s because there are not many blue-chip stocks available at decent valuations, so I figured I might as well build up positions in the companies in which I already had confidence.
Having long admired UnitedHealth Group’s business model, this seems as good a time as any to bring a new name into the Income Builder Portfolio.
My next article, to be published Wednesday, June 12, will chronicle our purchase of UNH, further examine the company’s dividend, and take a thorough look at its valuation.
— Mike Nadel
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