Healthcare is Here to Stay

Sharmistha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

According to Morgan Stanley; Healthcare is an attractive sector in the U.S and rates the reasons as achievable earnings estimates, rich cash flows, and modest valuations.

Dow average dumps Kraft Foods (NASDAQ: KRFT) for UnitedHealth Group (NYSE: UNH). The second oldest most closely watched U.S. benchmark said it was dropping Kraft because it is about to become a much smaller company after spinning off its North American grocery business. The change takes effect Sept. 24. The shift reflects the growing importance of healthcare expenses.  Last 12-months Kraft has not performed as well when comparing against its peers and equities. Kraft’s long-term debt more than doubled from $8.475 billion 2005 to $18.024 billion in 2009, as a result of activities such as the acquisition of LU Biscuits in 2007 for $7.6 billion. The Cadbury acquisition further increased debt levels by over $10 billion.  Kraft's tenure in the Dow was a short one, as it had been there only since September 2008, when it replaced American International Group. A Kraft spokeswoman declined to address the exit from the Dow but said: "As we separate into two industry-leading companies on Oct. 1, we remain focused on maintaining strong business momentum, driving solid growth for our shareholders, and making foods people love."

The swap of UnitedHealth for Kraft makes sense in terms of the similarity in share price, according to Nicholas Colas, chief market strategist at ConvergEx Group. "Price has to be a consideration, because that is the weighting," he said. "It's a logical swap, because it doesn't create too much of a disturbance in the weightings of the other components."

UnitedHealth joins pharmaceutical companies Pfizer and Merck & Co among the Dow's healthcare stocks. Insurance is already represented by Travelers Companies, though UnitedHealth will be the only insurance stock with a healthcare focus in the Dow's limited membership of 30 stocks.

Shares of UnitedHealth were up 0.1 percent at $53.93 recently, therefore up 7.9 percent so far this year. Kraft shares were down 0.5 percent at $39.93. UnitedHealth's revenue rose 5.4 percent to $23.19 billion, ahead of the $22.76 billion that analysts had expected. UnitedHealth became the first major health insurer to pay a dividend when it announced a 12.5 cent payout in early 2010, and now the company has once again shown its commitment to returning cash to shareholders. UnitedHealth Group is the parent company of various other health services organizations and health insurers. With $94.2 billion in revenue in 2010, UNH is the second-largest publicly traded health insurance company in the United States.

United Healthcare offers a comprehensive array of consumer-oriented health benefit plans and services for large national employers, public sector employers, mid-sized employers, small businesses and individuals nationwide. . The company generates 90% of its revenues through three health insurance organizations: one for private clients, one for Medicare recipients, and one for Medicaid beneficiaries.

United Health has consistent operating results. This lowers the risk that United Health will suddenly have difficulty and it increases investor confidence in the value they place on each share. UnitedHealth Group  first-quarter profit soared past Wall Street estimates on strong performance for its array of health plans. United Health's business strategy is to keep things simple. Clearly-defined strategies that lower business risks are the specialized areas of expertise. It is a health care provider that offers consumer-driven health insurance and benefit plans, health-care-focused financial services, beneficial processing and management services, corporate consulting services, software products, publications, and pharmaceutical development services.

United Health operates in highly competitive markets. The competitors include names like Aetna (NYSE: AET), Universal American (NYSE: UAM), and Triple-S Management (NYSE: GTS).

While on Aetna the Street Ratings rates it as a buy. The company's strengths can be seen in multiple areas, such as its revenue growth, notable return on equity, attractive valuation levels and largely solid financial position with reasonable debt levels by most measures. Aetna boasts a solid balance sheet with a debt ratio within its target range, and adequate financial flexibility Analysts, on average, expect earnings of $1.26 a share on revenue of $8.8 billion. AET has consistently distributed a dividend for at least the past 10 years. Such a long dividend history suggests AET is very established in its market and that its dividend distribution is likely to continue for a significant period of time.

Universal American is a Fortune 500 company with offices throughout the United States, and headquarters in Rye Brook, New York. Universal American's overall operating results and margins have shown improvement through lowered loss ratios and decreased administrative expenses through the first quarter of 2012. The stock has been drifting higher over the past nine trading days and is currently trading in a technical uptrend. Universal American expects to earn approximately $0.64 to $0.68 per diluted share for 2012, excluding any realized capital gains or losses and investments in Accountable Care Organizations (ACOs), our Medicare Advantage business and other growth opportunities. Richard A. Barasch, Chairman and CEO commented, “Our Medicare Advantage business continues to perform well. Our benefit ratios, after netting out positive prior period items, remain in line with our expectations and we are seeing the effect of reducing our cost structure. A.M. Best Co. has revised the outlook to stable from negative and affirmed the issuer credit rating (ICR) of “bb” of Universal American Corp.

Triple-S Management is moving up to a B (“buy”) this week from last week’s C (“hold”). Triple-S Management is an independent licensee of the Blue Cross Blue Shield Association. The stock price has risen 5.2% over the past month, better than the 1.7% increase the S&P 500 has seen over the same period of time. Its earnings growth of 11.79% lies within a moderate 10%-19% range and its annual sales of $2,235 million are encouraging. At a revenue growth rate of +17.7% TSS, favorable earnings trend over the last five years by playing a key role in business acquisitions and provider network development strategies. A strong network on a very balanced book of business has offset factors like difficult economic business environment. Recently, TSS has significantly lowered its risk exposure by limiting its focus to the administrative service only (ASO) side of the business. It remains the largest managed care insurer in Puerto Rico. A.M. Best believes that the Triple-S organization is well positioned at its current ratings. The company's ability to generate additional organic surplus growth while strengthening overall capitalization is definitely an angle that an investor will look into.

The healthcare industry was a laggard for several years, but it is slowly coming back into favor with investors. Healthcare stocks tend to be less sensitive to economic change and therefore the huge trust factor. The healthcare sector accounted for about 7.6% of gross domestic product last year, up from 6.6% in 2006, according to the U.S. Bureau of Economic Analysis data.

People are finally starting to see the healthcare segment climbing upward stock charts and the fundamentals are good. UnitedHealth Group has an astonishing $11.21 of cash on hand per share and has become a cash cow in the healthcare industry, and the free cash flow should continue to power impressive dividend growth in the foreseeable future.  The health care space contains mature industries and the trend seems positive to a steady growth pace than ever. The sector is considered one of the better performing groups of stocks among the S&P 500′s 10 sectors. Investors looking for long term stabilizing dividends should keep an eye on the health care sector as it is heading for a meteoric growth.

SharmisthaB 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. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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