Is Your Portfolio Insured by This Company?
Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a great way to gain a detailed and thorough perspective on a company and its future. As 2012 year draws to a close, I would like to focus on a leader in the health insurance industry: UnitedHealth Group (NYSE: UNH).
- Solid Revenue Growth: In 2006, UnitedHealth reported revenue of $71.7 billion; in 2011, the company announced revenue of $101.9 billion, representing year over year annual growth of 7.28%. This caliber of growth is widely anticipated to continue into the future, with projections putting 2016 revenue at $163.6 billion. This is mostly due to an increase in revenue per customer on a monthly basis.
- Dividend: At the moment, the company pays out quarterly dividends of $0.2125, which when annualized puts the dividend as yielding 1.55%.
- Discount Valuation: Currently, UnitedHealth carries a price to earnings ratio of 10.44, a price to sales ratio of 0.55, and a price to book ratio of 2.02, all of which point to a company valued at a discount.
- Lucrative Business Model: UnitedHealth has millions of customers, all of which pay massive payments to the company for their insurance plans, and because the company has 78 million customers as of the end of 2011, they only need a majority of the customers to not require extensive care in order to make a profit.
- Institutional Vote of Confidence: 88% of shares outstanding are held by institutional investors, displaying the confidence some of the largest investors in the world have in the company and its future.
- Debt: UnitedHealth currently possesses about $11.2 billion of debt on their balance sheets, a major disadvantage for the business.
- Tight Margins: At the moment the company possesses a net profit margin of 5.05%, leaving very little room for unexpected expenditures. This is mostly thanks to deterioration in the company’s pricing power in an attempt to remain competitive.
- Growth in Operating Expenses: A company that employs 99,000 people and is valued at $56.03 billion requires a substantial amount of money to run; but over the past ten years growth in operating expenses has outpaced growth in gross profits, a troubling sign.
- Margin Compression: Over the past 10 years, UnitedHealth’s revenue has grown 307.10%, while gross profit has only grown 268.3%, representing a compression in margins, an ominous sign.
- Acquisitions: In February 2012, UnitedHealth acquired XLHealth Corporation, and further acquisitions in the future are probable, and should fuel growth.
- Expansion in Customer Base: In 2011, UnitedHealth served 78 million people, and expansion in this customer base is likely, as 97% of the United States population is located within the webs of the company’s network.
- Dividend Growth: Since implementing their dividend program in 1990, UnitedHealth has consistently raised their dividend payouts, and this trend is widely anticipated to sustain well into the future.
- Economic Growth: If the United States economy was to improve, the unemployment rate would fall, and more people would have the money to purchase the luxury of health care, increasing UnitedHealth’s revenue.
- Government Regulation: Any government regulation calling for universal healthcare could substantially hurt the company’s profits, as thousands of people that require substantial amounts of care could be attached to the company. In addition, regulation in 2010 changed the dependent coverage age to 26, increasing the company’s liabilities.
- Competition: UnitedHealth Group is not the only kid on the health insurance block, and must compete with several other major corporations, which can lead to margin compression as each company attempts to offer the best product for the least amount of money.
- Deteriorating Economic Landscape: Any economic landscape in which the unemployment rate is on the rise will result in less people being able to pay for health coverage, and in result less customers for UnitedHealth.
- Epidemic: While this may be far fetched, any epidemic or outbreak that results in a large group of people requiring extensive care can hurt UnitedHealth’s profits.
Major publicly traded competitors of UnitedHealth include Aetna Incorporated (NYSE: AET), Coventry Health Care Incorporated (NYSE: CVH), WellPoint Incorporated (NYSE: WLP), and Humana Incorporated (NYSE: HUM). All of these companies offer health insurance plans that rival UnitedHealth’s offerings. Aetna is valued at $15.55 billion, and pays out a dividend yielding 1.72%. Coventry is valued at only $6.03 billion, and pays out a dividend yielding 1.12%. WellPoint is the largest of UnitedHealth’s rivals, valued at $18.54 billion, and pays out a dividend yielding 1.88%. Humana is substantially valued at $10.78 billion, and pays out a dividend yielding 1.53%.
The Foolish Bottom Line:
UnitedHealth was very recently added to the Dow Jones Industrial Average. Not only does the company add diversification to the index, the company also brings explosive revenue growth and an expanding dividend. The company faces many possible threats to its business, the most substantial being government regulation, especially because of the constant talks regarding the health care industry. All in all, UnitedHealth is a diversified giant that can be purchased today at the same price as in 2008, but with a much better valuation.
makinmoney2424 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend UnitedHealth Group and WellPoint. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!