For an industry that consumes over one-sixth of the U.S. GDP, healthcare has been a hard place for investors to make money. Hospital chains like Tenet Healthcare Corp. (NYSE:THC) remain troubled. Health service companies like Centene Corp (NYSE:CNC), which offer savings in serving Medicare and Medicaid patients, are going nowhere. Even big drug store chains like CVS Health Corp (NYSE:CVS) have fallen out of favor, down over 23% in just the last year.
But one company marches on, growing bigger and stronger, becoming a better investment every day: UnitedHealth Group Inc (NYSE:UNH). So far in 2017 UNH stock is up “only” 12.1%. But they’ve been on a forward march like this for decades, reversing only during the 2008 economic crisis.
Since 1990, UnitedHealth stock has split five times, and its return in that time has outpaced that of Apple Inc. (NASDAQ:AAPL) by nearly four-to-one.
The company’s market cap has continued to grow by an average of 22% per year for the last decade. Regardless of how Washington changes its health care policy, UNH adapts to it. To be fair, UnitedHealth drives it.
UnitedHealth: The Dominant Insurer
One thing that always shocked me, in the fight that halted the mergers of Cigna Corporation (NYSE:CI) and Anthem Inc (NASDAQ:ANTM), as well as Aetna Inc (NYSE:AET) and Humana Inc (NYSE:HUM), was the idea that they would reduce competition when the combined entities would have both been smaller than UNH, which opened for trade May 29 with a market cap of $174 billion.
UnitedHealth has won by gaining more control of what it spends on care than anyone else. Long before the Obama Administration proclaimed health IT as the way to control costs, UNH was putting its technology business together to form Optum, which delivers on that promise.
After Express Scripts Holding Company (NASDAQ:ESRX) bought Medco with an aim to dominate the Pharmacy Benefit Manager (PBM) field, UnitedHealth quietly bought Catamaran Corp. a competing PBM, gaining unprecedented control over drug costs.
Medicare Advantage plans are one of the best markets for insurers, combining government funds with private payments, and UNH stock dominates it through a long-standing marketing arrangement with the American Association of Retired Persons (AARP).
While UnitedHealth had only 11.4% of direct premiums written, its focus on the group market means it actually controls 54% of the health insurance market.
UNH: Profits Flow From Scale
The result is unprecedented scale and profitability.
UnitedHealth revenues grew by nearly 50% between 2013 and 2016, to nearly $185 billion. The company only draws 4% of those revenues to its bottom line (similar to a company like Wal-Mart Stores Inc (NYSE:WMT), as with the $2.172 billion, $2.23 per share, it earned in this year’s first quarter, on $48.723 billion in revenue. But its operating cash flow has grown steadily, to $9.795 billion in 2016, and for the first quarter of 2017 alone, it was $6.456 billion.
Despite its growing investment in facilities, UNH has kept its debt-to-assets ratio below 20%. It stood at under 19% at the end of March.
As Louis Navillier wrote for InvestorPlace on May 11, UnitedHealth “wins no matter the healthcare outcome.” It was a big winner before the ACA, a big winner under the ACA and it will remain a big winner should the ACA be repealed.
The Bottom Line on UNH Stock
The bottom line here should be obvious. UnitedHealth is a great long-term holding. It earns its premium price-to-earnings ratio of 23 by delivering superior results, controlling costs in ways policymakers dream of and competitors can only imagine.
The only thing that could threaten UNH stock would be if Washington woke up to its dominance and sought to break the company up, or nationalized it. That is not happening.
Dana Blankenhorn is a financial and technology journalist. He is the author of the political polemic Saving Trumpistan, Restoring Democracy, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in AAPL.
