Here’s why UnitedHealth rose 18% in October
What happened
Medicare actions UnitedHealth Group (NYSE: UNH) climbed 17.8% last month, according to data from S&P Global Market Intelligence.
UnitedHealth topped profit estimates for the fourth consecutive quarter and raised its guidance for the full year. The company now plans to end 2021 with approximately 20% higher earnings per share than the previous year.
So what
UnitedHealth’s revenue increased 11% in the last quarter, marking an acceleration from the 6% annual growth rate of the previous two years. This is impressive from a huge company that has a 15% share of a mature market. It is difficult to achieve that kind of growth rate at this level of market saturation. UnitedHealth experienced a margin squeeze from insurance taxes, but revenue growth was still strong enough to drive a 20% increase in operating profit. These benefits also translated into strong free cash flow.
Economic uncertainty is currently casting a dark shadow over the entire financial world, and health insurers are one of the few industries with relatively reliable cash flow. It’s appealing to investors looking for security in a hectic stock market.
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Now what
UnitedHealth has received praise for its growth and efficiency, and it’s only fair that the share price reflects that. This is especially true if investors are storing capital here as a defensive investment. However, recent gains may have eliminated any upside potential available in the stock.
UnitedHealth has expensive valuation ratios. Its forward P / E ratio is now 21.1 and its price / book value is 5.9. Both are more expensive than peers CVS Health (NYSE: CVS), Anthem (NYSE: ANTM), Where Cigna (NYSE: CI), even taking into account growth. These ratios are also at the high end of UnitedHealth’s historical range. There isn’t much room for new returns from valuation inflation, especially as the Federal Reserve begins to gradually cut interest rates.
The share pays a dividend of 1.2%. Even with its very sustainable 33% payout ratio, this dividend yield is not high enough to carry an income investment portfolio. UnitedHealth has seen excellent growth so far this year, but it cannot be considered a long-term growth stock. It’s too big and too mature. As a value stock, there isn’t a lot of potential at the current valuation.
UnitedHealth can help protect your equity portfolio from loss if market conditions are tough, due to its stability. However, the insurance giant is not immune to bear markets.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.