Image Shown: Shares of dividend growth idea UnitedHealth Group Inc have put up stellar performance so far in 2022.
By Callum Turcan
On October 14, UnitedHealth Group Inc (UNH) reported third quarter 2022 earnings that beat both consensus top- and bottom-line estimates. The health care giant also increased its full-year guidance for 2022 (again) during its latest earnings update after previously boosting its full-year guidance during both its first and second quarter earnings reports. We include shares of UnitedHealth Group as an idea in the Dividend Growth Newsletter portfolio as the company is a stellar free cash flow generator backed up by a pristine balance sheet and bright growth outlook. Shares of UNH yield ~1.3% as of this writing.
Earnings and Acquisition Update
UnitedHealth Group reported that its GAAP revenues rose by 12% year-over-year to reach $80.9 billion in the third quarter of this year. Revenue at its health insurance business unit, UnitedHealthcare, rose by 11% year-over-year and revenue at its health care services provider business unit, Optum, rose by 17% in the third quarter. As it concerns its health insurance operations, the firm noted that (emphasis added):
The third quarter 2022 medical care ratio [health care payouts at its insurance business divided by health care premiums] was 81.6% compared to 81.5% in the second quarter 2022 and 83.0% in the third quarter of 2021, due to COVID effects and business mix. Favorable medical reserve development of $870 million compared to $890 million in the second quarter 2022 and $700 million in the year ago third quarter. Days claims payable were 50.8, compared to 50.6 in the second quarter of 2022 and 50.4 in the third quarter of 2021…
Total people served domestically by UnitedHealthcare has grown by approximately 850,000 in 2022, including 185,000 in the third quarter. Growth was led by UnitedHealthcare’s community-based and senior offerings. The number of people served with domestic commercial benefit insurance offerings has grown by more than 100,000 over the past six months.
Additionally, as it concerns its health care services operations, UnitedHealth Group commented that (emphasis added):
Optum Health revenue per consumer served increased 31% over the year ago period, driven by growth in value-based care arrangements and continued expansion of care delivery platforms, including in-home, clinic-based, ambulatory surgery, behavioral and digital.
Optum Insight revenue grew 18% in the third quarter led by the growth of payer and provider services. Revenue backlog increased by $1.8 billion over the year ago period to $24.1 billion. The combination with Change Healthcare was completed at the beginning of the fourth quarter 2022 and will accelerate efforts to better connect and simplify the core clinical, administrative and payment processes health care providers and payers depend on to serve patients.
Optum Rx’s revenue growth of 8% in the third quarter reflects the impact of serving new clients and further expansion of pharmacy care services offerings, including specialty and community pharmacy. Adjusted scripts grew to 359 million compared to 344 million last year.
Back in January 2021, UnitedHealth Group announced it was acquiring Change Healthcare for $25.75 per share in cash through an ~$8 billion deal. Originally, the deal was supposed to close in the second half of last year though regulatory hurdles and other roadblocks prevented the acquisition from closing until October 2022.
Change Healthcare offers health care technology services that aim to improve the efficiency of the health care system, particularly on the administrative side of things. One of the major reasons why UnitedHealth Group pursued the deal was due to the synergies that could arise from combining the automated payment operations of its Optum unit with Change Healthcare’s payment capacities. Another reason involves improving the claims transaction process and reducing administrative waste, which in theory can be made possible by combining Optum’s advanced data analytics operations with Change Healthcare’s intelligent health care network. This should enable health care claims to get processed faster and reduce errors while generating greater insights that could be used to further improve UnitedHealth Group’s business.
Going forward, we are excited by the potential synergies the tie-up of UnitedHealth Group and Change Healthcare could provide. Please note that as the deal closed after the end of UnitedHealth Group’s third quarter, the financial impacts of the acquisition have yet to be reflected in UnitedHealth Group’s financial statements.
During the third quarter, UnitedHealth Group’s GAAP operating income rose 31% year-over-year to reach $7.5 billion. Revenue growth, economies of scale, a lower medical care ratio at its health insurance unit, growth in the number of people covered by its health insurance unit, and strong performance across the board at its health care services provider business (rising revenue per customer at its Optum Health business, robust revenue growth at its Optum Insight business, and strong adjusted scripts growth at its Optum Rx business) all helped power UnitedHealth Group’s financials higher last quarter.
Its GAAP diluted EPS came in at $5.55 in the third quarter, up 30% year-over-year, and its non-GAAP adjusted diluted EPS came in at $5.79, up 28%. Meaningful share buybacks saw UnitedHealth Group’s diluted weighted-average share count drop by 1% year-over-year in the third quarter.
Financial Strength Maintained
At the end of September 2022, UnitedHealth Group had $42.6 billion in cash and short-term investments along with $41.6 billion in long-term investments on the books versus $3.2 billion in short-term debt and $45.4 billion in long-term debt. Please note that the company also had substantial medical cost payable liabilities on the books at the end of this period. We are huge fans of UnitedHealth Group’s net cash position, which sat at ~$35.4 billion at the end of the third quarter.
During the first three quarters of 2022, UnitedHealth Group generated $28.8 billion in free cash flow and spent $4.5 billion covering its dividend obligations along with $6.0 billion buying back its common stock. There is an enormous amount of room for UnitedHealth Group to further boost its dividend going forward, and its payout is well-covered by its stellar free cash flows and fortress-like balance sheet.
Guidance Update
UnitedHealth Group is now guiding to generate $20.85-$21.05 in GAAP diluted EPS and $21.85-$22.05 in non-GAAP adjusted diluted EPS this year. For reference, UnitedHealth Group posted $18.08 in GAAP diluted EPS and $19.02 in adjusted diluted EPS in 2021. At the midpoint of its latest guidance, UnitedHealth Group is forecasting that its reported diluted EPS will grow by 16% and its adjusted diluted EPS will grow by 15% on an annual basis this year.
Concluding Thoughts
We are huge fans of UnitedHealth Group, and its dividend growth potential remains immense. The top end of our fair value estimate range sits at $599 per share of UnitedHealth Group, indicating that the health care giant also possesses substantial capital appreciation upside as well. UnitedHealth Group’s acquisition of Change Healthcare is intriguing and should generate material synergies going forward. Looking ahead, we expect that UnitedHealth Group will grow its dividend at a robust pace, aided by its strong free cash flow generating abilities and pristine balance sheet.
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Callum Turcan owns shares in DIS, META, GOOG, VRTX, and XLE. 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. 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.
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