UnitedHealth Group (UNH) isn’t a very sexy play. The insurance company is in a highly regulated industry, and UNH stock doesn’t have all the hype around it that momentum stocks like Tesla (TSLA) or Facebook (FB) do.
But UNH stock is a highly profitable investment for anyone who has bought in over the last several years. UnitedHealth Group stock is up more than 230% since October 2009 to more than triple the 75% gains or so for the S&P 500 in the same period. More recently, UNH stock is up 14% year-to-date in 2014 vs. a flat stock market.
Recent earnings from UNH prove once again why this stock has staying power. UnitedHealth Group’s Q3 earnings increased yet again, with 2% growth in profits and 7% growth in revenue. Both measures topped Wall Street expectations for UNH earnings.
Here’s why UnitedHealth stock is popping on these results, and what it says about healthcare stocks broadly:
UNH Stock Still Finding Growth
UnitedHealth is largely driven by premiums from its health insurance business, which covered about 45 million people as of last quarter.
The bad news is that enrollment count is about 1% lower than a year ago. Furthermore, medical costs — by far the biggest line item among UNH expenses — rose 5% over the previous quarter.
However, profit and revenue still climbed … proving UNH can’t be held back by these trends.
UnitedHealth is benefiting from a host of tailwinds right now that will help it long-term, including:
Obamacare: Say what you want about the politics of the Affordable Care Act, but enrollment has beat expectations — and that means insurers like UnitedHealth Group and its peers WellPoint (WLP) and Aetna (AET) will enjoy more “customers” over time as a result.
Click to EnlargeHealthcare Costs: While everyone knows that healthcare prices have soared over the last few decades, in 2013 prices for healthcare rose at the slowest pace in 50 years. While inflation still exists, the long-term trend of healthcare inflation is slowing, as evidenced by this chart from the last few years.
Consolidation: While it’s true that the healthcare industry is highly regulated, it’s equally true that competition continues to dry up. Much like the airline industry, there are a few major players that remain, and with such a high barrier to entry, it is next to impossible for a small upstart to join and upset the space.
Admittedly, UNH is a bit of a dividend miser. It will earn more than $6 in earnings per share next year and currently pays out just $1.52 in dividends annually for a meager 25% payout ratio. The headline yield of 1.8% is less than 10-year Treasuries, and long-term investors are right to expect more income from this $80 billion healthcare giant.
Of course, at the beginning of 2011, UNH stock paid just 13 cents a quarter in dividends and now it pays 38 cents quarterly… so if our biggest complaint about solid healthcare players like UnitedHealth is that they can pay bigger dividends despite tripling payouts in the last few years… well, there are worse problems to have.
UNH stock posted strong earnings and continues to prove the power and stability of healthcare stocks in this market. I rate the stock a strong buy for long-term investors, particularly those with the patience for the almost-guaranteed dividend growth this stock will enjoy in the years ahead.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.
