Image Shown: Shares of dividend growth idea UnitedHealth Group Inc have surged higher over the past year. The company put up solid performance in 2021 and its guidance for 2022 indicates that its growth trajectory is expected to continue.
By Callum Turcan
On January 19, UnitedHealth Group Inc (UNH) reported fourth-quarter 2021 earnings that beat both consensus top- and bottom-line estimates. The company’s health insurance business is covered by its ‘UnitedHealthcare’ segment, and its health care provider business is covered by its ‘Optum’ segment. Virtually all of the firm’s revenues come from the U.S. It also reaffirmed its guidance for 2022 in its fourth-quarter earnings report. We continue to be impressed with UnitedHealth and include shares of UNH as an idea in the Dividend Growth Newsletter portfolio. Shares of UNH yield ~1.3% as of this writing.
Earnings Update and Outlook
In the fourth quarter, UnitedHealth grew its GAAP revenues by 13% year-over-year as its ‘premiums’ sales climbed higher by 14% and its ‘services’ sales rose by 12%. We appreciate the widespread strength seen across UnitedHealth’s operations as both its UnitedHealthcare and Optum business reporting segments posted double-digit sales growth on a year-over-year basis in the fourth quarter.
UnitedHealth’s GAAP operating income surged 58% higher year-over-year in the fourth quarter, aided in part by its ‘operating costs’ shifting lower during this period as dealing with the coronavirus (‘COVID-19’) pandemic has become more manageable over time–and in part due to productivity gains. Additionally, UnitedHealth is benefiting from the repeal of the health insurance tax that came into effect in 2021 through legislation that was signed into law back in December 2019. Please note that previously, the health insurance tax had been delayed through other legislation measures.
On a full-year basis, UnitedHealth grew its GAAP revenues by 12% and its GAAP operating income by 7% year-over-year in 2021. The company’s medical care ratio (medical costs as a percentage of premium revenues) stood at 82.6% in 2021, up from 2020 levels, as elective surgery activities normalized in the US. Its UnitedHealthcare business served 2.2 million more people in 2021 than it did in 2020, aided by “continued strong growth in Medicare Advantage and Dual Special Needs Plans and expansion in the broader Medicaid market” according to its latest earnings press release.
Its Optum business also put up strong performance last year as its Optum Health segment was serving roughly 2 million more people at the end of 2021 versus year-ago levels. Additionally, revenue per customer served increased by 33% at Optum Health, which was “driven by further expansion of people served in value-based care arrangements and the continued build-out of care delivery capabilities, including in-home physical and digital offerings complementing its growing clinic-based and outpatient services” according to its latest earnings press release.
Looking ahead, UnitedHealth forecasts that it will generate $317-$320 billion in revenue this year, which represents 11% annual growth at the midpoint. Additionally, UnitedHealth expects to generate $21.10-$21.60 in non-GAAP adjusted EPS (up 12% year-over-year at the midpoint) and $23.0-$24.0 billion in operating cash flow (up 5% year-over-year at the midpoint) this year. UnitedHealth’s growth trajectory is expected to continue in earnest in 2022, which we appreciate.
UnitedHealth generated $19.9 billion in free cash flow in 2021 while spending $5.3 billion covering its dividend obligations and another $5.0 billion buying back its stock. The company is a cash flow generating powerhouse. Inclusive of long-term investments and short-term debt, UnitedHealth had a $21.0 billion net cash position at the end of December 2021, though we caution it also had significant other non-cancellable financial liabilities on the books. There is a lot to like about UnitedHealth’s financials.
Concluding Thoughts
Our fair value estimate for UnitedHealth sits at $409 per share and the top end of our fair value estimate range sits at $511 per share. As of this writing, UNH is trading in the upper bound of our fair value estimate range, though there is ample room for additional capital appreciation upside potential as it continues to outperform.
The company has a solid track record of dividend growth. UnitedHealth last increased its payout by 16% sequentially for the dividend paid out in June 2021. We expect its dividend growth trajectory will continue in earnest over the coming years, a feat made possible through its fortress-like balance sheet, stellar free cash flow generating abilities, and promising growth outlook.
UnitedHealth continues to work towards completing its ~$13 billion all-cash acquisition of Change Healthcare Inc (CHNG), which was announced back in January 2021, though regulatory hurdles have pushed the targeted closing date back to April 2022 (from the second half of 2021 originally). We are big fans of UnitedHealth and view its dividend growth potential quite favorably, even if its deal for Change Healthcare does not go through as planned.
We covered our thoughts on the pending acquisition in a January 2021 article that can be viewed here.
Downloads
UnitedHealth Group’s 16-page Stock Report (pdf) >>
UnitedHealth Group’s Dividend Report (pdf) >>
—–
Health Care Bellwethers Industry – JNJ, WBA, CVS, ISRG, MDT, ZBH, BAX, BDX, BSX, MTD, SYK, BIIB, GILD, ABT, ABBV, LLY, AMGN, BMY, MRK, PFE, VRTX, ZTS, REGN, UNH
Tickerized for UNH, MOH, ANTM, CNC, CI, HUM, THC, UHS, CYH, HCA, ABC, CAH, CVS, WBA, EHTH, GTS, TDOC, CHNG, XLV
Valuentum members have access to our 16-page stock reports, Valuentum Buying Index ratings, Dividend Cushion ratios, fair value estimates and ranges, dividend reports and more. Not a member? Subscribe today. The first 14 days are free.
Callum Turcan does not own shares in any of the securities mentioned above. Johnson & Johnson (JNJ) and Health Care Select Sector SDPR Fund (XLV) are both included in Valuentum’s simulated Best Ideas Newsletter portfolio and simulated Dividend Growth Newsletter portfolio. Vertex Pharmaceuticals Inc (VRTX) is included in Valuentum’s simulated Best Ideas Newsletter portfolio. UnitedHealth Group Inc (UNH) is included in Valuentum’s simulated Dividend Growth Newsletter portfolio. Vanguard Consumer Staples ETF (VDC) is included in Valuentum’s simulated High Yield Dividend Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.