Is UnitedHealth's Dividend Safe?


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UnitedHealthcare (NYSE: UNH) is one of the nation's biggest healthcare insurers, serving nearly 87 million Americans across its various healthcare products. As a result, UnitedHealthcare is often included in dividend investor's portfolios.Big insurers such as UnitedHealthcare, WellPoint (NYSE: WLP) and Aetna (NYSE: AET) offer investors predictable dividend-friendly revenue regardless of the economy's whims and whispers. But investors are correct to wonder if UnitedHealth's dividend can be sustained in light of Obamacare regulation and soaring medical costs. In the following slideshow you'll see whether I think UnitedHealth's dividend is safe and gain insight into how UnitedHealth's dividend payout matches up with industry peers WellPoint and Aetna.

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Is UnitedHealth's Dividend Safe?

  1. 1. Is UnitedHealth’s Dividend Safe?
  2. 2. Is UnitedHealth’s Dividend Safe? 2 big and important question hangs over UnitedHealth’s dividend: • Will adding new insurance members through healthcare exchanges erode margin? •UnitedHealth participates in the exchanges in just 5 states. •However, the company plans to increase participation this year. •UnitedHealth has filed to participate in Washington State this year. •Its Allsavers brand will likely be available in Indiana too. • Will costs of care tied to more expensive medicine erase profit? •Overall drug spending in the U.S. grew 5.4% in 2013, according to Express Scripts. •Spending on specialty drugs jumped 14.1% in 2013.
  3. 3. Will reform reduce margin? There’s little question that the addition of hundreds of thousands of new members will benefit UnitedHealth’s top line. •UnitedHealth’s first quarter revenue jumped by $1 billion, or 3.6% thanks in part to ACA reform driven membership growth, particularly in Medicaid. •UnitedHealth expects revenue will climb from $122.5 billion last year to $128 billion to $129 billion in 2014. •Industry analysts think sales could rise to as much as $137 billion in 2015. However, the cost of caring for those members could reduce profitability, especially if fewer healthy, young people sign up for insurance coverage through exchanges.
  4. 4. Will reform reduce margin?
  5. 5. Will reform reduce margin? Despite improvement in its Medicaid business, which grew by 255,000 members in the quarter thanks to Medicaid expansion, UnitedHealth’s operating margin sank in the first quarter from 5.7% last year to 4.8% this year. Overall, United’s consolidated operating margin (including its Optum services business) has fallen from 8.5% to 7.7% since 2012, yet that still outpaces peers WellPoint and Aetna and revenue growth has still allowed United to deliver overall net income growth.
  6. 6. Will soaring prices for medicines curb profit? The FDA approval of ultra-high priced medicine such as Gilead’s hepatitis C drug Sovaldi has insurers scrambling. •Gilead’s Sovaldi costs $84,000 and there are 3.2 million living with chronic HCV in the U.S. •Spending on hepatitis C drugs by insurers is expected to climb 102% in 2014 and 208% in 2015. •UnitedHealth spent $100 million on hepatitis C treatment in the first quarter. The approval of high priced autoimmune and oncology drugs is expected to contribute to average spending growth for specialty medicine of 17% in 2014 and 18% in 2015, according to Express Scripts 2013 Drug Trend Report. •The National Cancer Institute estimates spending on breast cancer alone could climb from $16.5 billion in 2010 to as much as $25 billion in 2020.
  7. 7. Will soaring prices for medicine curb profit? Despite that headwind, UnitedHealth appears comfortable in its 2014 earnings forecast. It kept its 2014 guidance unchanged at between $5.40 and $5.60 exiting the first quarter. Analysts appear even more optimistic, expecting UnitedHealth’s earnings to accelerate to $7.76 per share in 2017.
  8. 8. Is there room for dividend growth? UnitedHealth’s cash dividend payout ratio, which measures how much cash is being spent on dividends after paying for capital expenses and preferred dividends, is healthy at 18.5%. It’s payout; however, is a bit higher than WellPoint and Aetna’s, but all three appear to have room to boost dividends in the future.
  9. 9. How does the dividend yield stack up? Following a 34% hike in its quarterly dividend on June 4th, UnitedHealth’s dividend yield is 1.9%. That’s higher than both WellPoint and Aetna. United’s board has also authorized the repurchase of 100 million shares, suggesting that the c-suite is comfortable with plan pricing and profit. As a result, UnitedHealth’s dividend appears safe.
  10. 10. The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.