Image Shown: Shares of dividend growth idea UnitedHealth Group Inc moved higher in the wake of its latest earnings report and guidance boost.
By Callum Turcan
On October 14, the health insurance and health care services provider giant UnitedHealth Group Inc (UNH) reported third-quarter 2021 earnings that beat both consensus top- and bottom-line estimates. The company also raised its full-year earnings guidance (again) for 2021 in conjunction with its latest earnings report, boosting its EPS forecast to $17.70-$17.95 and its non-GAAP adjusted EPS forecast to $18.65-$18.90.
Please note that UnitedHealth Group also increased its full-year earnings guidance during the first and second quarters of 2021. Back in December 2020, UnitedHealth Group expected to post $16.90-$17.40 in EPS and $17.75-$18.25 in adjusted EPS, and for reference, the company posted GAAP EPS of $16.03 and adjusted EPS of $16.88 in 2020. At the midpoint of its current guidance, UnitedHealth aims to grow both its EPS and adjusted EPS by 11% year-over-year in 2021.
We appreciate UnitedHealth Group’s numerous guidance boosts as that speaks quite favorably to the notion that its business is recovering at a robust pace from the worst of the coronavirus (‘COVID-19’) pandemic. Shares of UNH are included as an idea in the Dividend Growth Newsletter portfolio as we are enormous fans of its fortress-like balance sheet and ability to generate free cash flows in almost any operating environment. As of this writing, shares of UNH yield ~1.4%.
Earnings Update
During the first three quarters of 2021, UnitedHealth Group generated $17.4 billion in free cash flow and spent $3.9 billion covering its dividend obligations along with another $4.0 billion buying back its stock. At the end of September 2021, UnitedHealth Group had $21.7 billion in net cash on hand (inclusive of short-term debt and long-term investments), though we caution that the firm also has substantial non-cancellable financial obligations on the books to be aware of (such as medical costs payable and other liabilities stemming from its health insurance business).
UnitedHealth Group’s GAAP revenues rose 12% year-over-year during the first nine months of 2021 on the back of strong sales growth seen at its premiums, services, and ‘investments and other income’ categories as its products sales were up marginally during this period. The company’s health insurance customer base continues to grow at a robust pace while its health care provider and solutions business continues to generate substantial synergies across its business. Its GAAP operating income fell 2% year-over-year during the first nine months of 2021 due primarily to its health insurance customers resuming procedures that were delayed in the wake of the COVID-19 pandemic. UnitedHealth Group’s GAAP EPS grew marginally year-over-year and adjusted EPS grew by 1% year-over-year during this period, aided by a reduction in its outstanding diluted share count.
Operations Update
In the third quarter of 2021, UnitedHealth Group’s medical care ratio—health care expenses divided by health insurance premiums—stood at 83.0% versus 81.9% in the same period last year. As a rule of thumb, a medical care ratio below 85% is usually the goal in the industry. The company’s health insurance business is conducted through its UnitedHealthcare unit.
UnitedHealth Group’s health insurance business experienced “strong growth” at its community, senior, commercial risk, and fund-funded offerings via a combination of “commercial business expansion and organic growth in both specialty and medical benefits” according to its latest earnings press release. Here is some additional commentary from UnitedHealth Group on the issue that was included in its latest earnings press release:
Total people served by UnitedHealthcare grew by 790,000 in the third quarter and nearly 2 million people since the end of 2020, led by continued strong growth in Medicare Advantage, Dual Special Needs Plans and Medicaid more broadly. New Medicaid regions served this year include North Carolina, Kentucky and Indiana, with recent new contract awards in Nevada, Ohio and Hawaii. UnitedHealthcare is on pace to grow by more than 900,000 additional people in Medicare Advantage this year including Dual Special Needs Plans.
We appreciate UnitedHealth Group’s ability to continue growing its health insurance customer base, and its expansion plans speak favorably towards its future growth endeavors on this front. During the company’s latest earnings call, the firm noted that it began to serve “people in the Missouri Medicaid expansion this month” and that its employer-sponsored benefits (as part of its commercial offerings) programs had recorded robust growth of late.
As it concerns its health care services provider and solutions business, Optum, UnitedHealth Group noted that the firm experienced robust operating earnings growth across the board last quarter. Its OptumHealth unit saw its “revenue per consumer served grow 30% year-over-year in the [third] quarter and the business grew to serve 99 million people at the end of third quarter 2021 compared to 98 million a year ago” aided by the “build-out of local market care delivery services, including clinic-based and outpatient services, and in-home physical and digital capabilities” and serving more customers in “value-based care arrangements” according to its latest earnings press release. During the firm’s latest earnings call, management stressed that providing in-home health care services, whether digitally or physically, was essential to improving patient outcomes and offered ample synergies when paired with its UnitedHealthcare insurance offerings.
The firm’s OptumInsight unit posted strong backlog growth (up $2.4 billion or 12% year-over-year, reaching $22.3 billion) last quarter with “with the growing backlog and pipeline driven by comprehensive managed services, including revenue management, care coordination, digital modernization and payment integrity services” according to its latest earnings press release. UnitedHealth Group recently secured a big partnership between OptumInsight and SSM Health, which serves customers in Illinois, Missouri, Oklahoma, and Wisconsin. According to its website, SSM Health’s operations “[include] 23 hospitals, more than 290 physician offices and other outpatient and virtual care services, 10 post-acute facilities, comprehensive home care and hospice services, a pharmacy benefit company, a health insurance company and an accountable care organization.” During UnitedHealth Group’s latest earnings call, management noted that demand for OptumInsight’s software and analytics offerings remained robust.
UnitedHealth Group’s OptumRx unit posted a 6% year-over-year increase in its “adjusted scripts” last quarter, which was “driven by growth in people served and as the provision of care and usage of pharmaceuticals has continued to recover over the last year” according to its latest earnings press release. OptumRx is focused on growing its specialty pharmacy, infusion services, and e-commerce businesses while growing its presence in community-based behavioral health pharmacies. During UnitedHealth Group’s latest earnings call, management noted that OptumRx “is seeing both strong customer retention levels and sale success for the largely completed [2022] selling season and early activity for [2023]” which speaks favorably to the firm’s growth trajectory. Additionally, OptumRx is helping improve patient outcomes while boosting efficiency and reducing health care costs according to recent management commentary.
Outlook
While management commented that it was still too early to provide concrete guidance for 2022 and that investors would need to wait until UnitedHealth Group’s upcoming investor event scheduled for November 30, the firm did have a few things to say during its latest earnings call. Here are a few key excerpts (moderately edited, emphasis added):
“Now, with the close of the third quarter, your attention understandably turns to next year. As is our custom, we will offer a few early observations here…
Our businesses are both growing and operating well with strong momentum heading into next year.While the pandemic-related impacts remain difficult to predict, given the current trends, we would expect a lower unfavorable COVID impact than experienced in ’21. Still, as the dramatic variation of the last 20 months has demonstrated to all, prudent management suggests we should offer an outlook respectful of the fact that the current situation is without precedent. Taking all elements together at this distance, we see current analyst consensus as reasonably beginning to calibrate a ’22 outlook…
There’s still untapped collaborative potential between UnitedHealthcare and Optum to benefit individuals and the system. The power of applied technology to advanced care and service. Improved opportunities in consumer health and experience, and the passion of our people. These and so many other elements lead us to believe our performance expectations for the years ahead remained fully supportive of our long-term 13% to 16% earnings-per-share growth outlook.” — John Rex, Executive VP and CFO of UnitedHealth Group
UnitedHealth Group’s growth outlook is quite bright, and we will have more to say on the issue after its upcoming investor event.
Pending Acquisition
Back in January 2021, UnitedHealth Group announced it would acquire health care payment solutions provider Change Healthcare Inc (CHNG) for $25.75 per share in cash. UnitedHealth Group possess the financial capacity to fund this ~$13 billion deal (when including debt) while maintaining its fortress-like balance sheet; however, the acquisition is facing sizable opposition. The US Department of Justice (‘DOJ’) has requested information on the deal several times and some industry groups oppose the acquisition. During its latest earnings call, UnitedHealth Group’s management team reiterated their support for the deal and noted that closing is targeted in the first half of 2022 (closing was initially targeted in the second half of 2021).
We are keeping a close eye on the acquisition, and while we are supportive of the deal given the synergies to be had by integrating Change Healthcare’s payment solutions into Healthcare Group’s operations, we would continue to like shares of UNH even if the acquisition does not go through. UnitedHealth Group excepts the deal to be accretive to its earnings performance with room for upside via targeted synergies. Back in January 2021, we provided our thoughts on the deal in this article here.
Concluding Thoughts
UnitedHealth Group is firing on all cylinders which is enabling management to continuously boost the company’s earnings guidance, a powerful testament to the resilience of the firm’s business model. Its free cash flow performance continues to impress, the company’s balance sheet is pristine, and the firm has several initiatives underway to grow its UnitedHealthcare and Optum business units going forward.
Ultimately, the company aims to improve patient outcomes, expand access to various health care services, generate meaningful efficiencies in the health care sector, and reduce costs by creating synergies across its business by integrating the operations of its health insurance, health care provider, and health care solutions businesses. So far, UnitedHealth Group has delivered on this front. The top end of our fair value estimate sits at $511 per share of UnitedHealth Group, and we continue to like shares of UNH as an idea in the Dividend Growth Newsletter portfolio.
Downloads
UnitedHealth Group’s 16-page Stock Report (pdf) >>
UnitedHealth Group’s 2-page Dividend Report (pdf) >>
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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. Long put options on the SPDR S&P 500 ETF Trust (SPY) with an expiration date of December 31, 2021, and strike price of $412 are included in both Valuentum’s simulated Best Ideas Newsletter portfolio and simulated Dividend Growth 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.