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UnitedHealth Group:
Growing Dividends, Profitable Growth

Ingrid Hendershot, Founder and President, Hendershot Investments, Inc. recently rated UnitedHealth Group (UNH) “Buy.” UNH is the largest U.S. health care management company offering a broad spectrum of products and services including private health insurance, health plan administration, pharmacy benefit management, ambulatory care and healthcare analytics. Through its two complementary platforms, UnitedHealthcare for health benefits and Optum for optimizing healthcare services, the company serves about 143 million people worldwide. Here is Hendershot’s analysis of UnitedHealth Group:

“UnitedHealth Group traces its roots to Dr. Paul Ellwood, the health-policy guru who coined the term “health maintenance organization” during the 1960s. “In 1977, Paul Ellwood helped entrepreneur Richard Burke establish United Healthcare to manage the newly created Physicians Health Plan of Minnesota, an early HMO. By combining best practices in medical care with the best thinking in business management, the company’s founders sought to improve the health of patients by expanding health coverage options and strengthening the health care system. Since its founding, the firm has consistently differentiated itself from its peers through the effective use of technology to improve care. Today, UnitedHealthcare, the firm’s health care insurance arm, collaborates with Optum, its information and technology-enabled health services arm, to deliver better clinical outcomes while bending the cost curve.

UnitedHealthcare, which generated 81% of UNH’s total 2018 revenues and 53% of its operating income, provides insurance to 50 million people. As the nation’s largest health insurer, the firm provides insurance through employer and individual plans, Medicare Supplemental and Advantage plans, Medicare plans plus benefits and health care delivery in more than 130 countries worldwide.

Optum, which generated 19% of UNH’s total 2018 sales and 47% of its operating income, provides technology enabled health services for patients, providers, pharmacies, hospitals, payers and life sciences organizations. The largest business within Optum is OptumRX, a pharmacy benefit manager (PBM), that generated over 20% of UNH’s 2018 operating income and served 65 million people nationwide.

OptumHealth provides health care services to over 14 million patients through more than 36,000 physicians and 900 primary, urgent and surgery care centers. OptumInsight provides data analytics, artificial intelligence, consulting and management solutions. OptumInsight serves three out of four U.S. payers helping them improve health outcomes while reducing costs. Furthermore, four of five U.S. hospitals rely on Optum IT to process $65 billion in annual billings.

Integration of UnitedHealth Group’s health insurance business with Optum provides the company with a significant competitive advantage, namely lower costs. Given its low cost producer advantage and its long history of remaining on the leading edge of healthcare industry changes, UNH is well positioned to navigate through future healthcare reform.

Profitable Growth

During the past five years, UNH has grown revenues at a healthy 15% annual rate with net income and EPS compounding even higher at 21% annual rates, respectively. UnitedHealth Group’s return on shareholders’ equity averaged 18.4% during the last decade, including 22.1% in 2018. This demonstrates the company’s well-established capital allocation strategy.

Growing Dividends

UnitedHealth Group has increased its dividend at or above a 20% clip during the past decade with the dividend compounding at a 25% annual rate during the past five years. For fiscal 2019, the company increased its dividend by 20% to an annual rate of $4.32.

Second Quarter Results

UnitedHealth Group reported second quarter revenues increased 8% to $60.6 billion with net income increasing 13% to $3.3 billion and EPS up 15% to $3.42. During the first half of 2019, the company generated $8.1 billion in free cash flow, representing a free cash conversion rate of 1.2 times earnings. During the first half of 2019, the company returned $6.4 billion to shareholders through dividends of $1.9 billion and share repurchases of $4.5 billion at an average price of $247.25 per share.

2019 Outlook

Management expects 2019 revenue to be at or slightly below prior guidance of $243 billion to $245 billion, reflecting the loss of Cigna as a PBM customer due to its merger with Express Scripts. EPS is now expected in the $13.95 to $14.15 range, up from prior guidance of $13.80 to $14.15. Investors seeking healthy long-term returns should consider buying UnitedHealth Group, a HI-quality market leader with profitable growth, growing dividends and a favorable outlook. Buy.

Editor’s Note: Founded in 1994, Hendershot Investments Inc. provides investment management, financial planning and a high level of personal service for those with $250,000 or more in investable assets. For more information visit www.hendershotinvestments.com.

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