United Health Group is there Value in Health Insurance?

Many investors are wondering how stable health insurers really are because of recent news stories. One of the largest; United Health Group (NYSE: UHG) has made headlines for its decision to dramatically scale back its Obamacare exchange business.

To add to the worries a proposal to create single-payer health insurance; which would effectively wipe out some insurers’ business, is on the ballot this fall in Colorado. A popular but failed presidential candidate; US Senator Bernie Sanders (D-Vermont), was able to attract a lot of attention on the campaign trail with a similar plan. The probable Democratic presidential nominee, Hillary Clinton, has been an outspoken proponent of single-payer in the past.

With all this many investors are undoubtedly just how safe health insurance companies are and how much longer their business can last. The popularity of Sanders and the outrage over Obamacare indicates that Americans are fed up with the health insurance system and demanding radical change.

UnitedHealth Group is making a Lot of Money

Despite all that, UnitedHealth Group is a very good investment. The company’s latest earnings report indicates that health insurance is still a great value investment, even if most Americans hate the system.

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The latest financial numbers clearly show us that UnitedHealth is a value investment. The highlights of company’s first quarter 2016 earnings report include:

  • $165.88 billion in revenue. UnitedHealth’s revenue increased by $8.77 billion during the first quarter; rising from $146.94 billion to $165.88 billion, so its business is growing dramatically.

 

  • A diluted earnings per share number of 6.22

 

  • A net income of $6.011 billion. The net income increased by $201 million during the first quarter rising from $5.813 billion to $6.011 billion.

 

  • A profit margin of 3.62%.

 

  • A free cash flow of $1.893 billion.

 

  • $9.789 billion in cash from operations. Cash from operations increased by $4.9 million during the first quarter rising from $9.74 billion to $9.789 billion.

 

  • $12.91 billion in cash and short-term investments in March 2016. A number that did not change from December 2015. This means UnitedHealth’s business generates a lot of float.

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UnitedHealth’s Political Nightmare

When you judge it by the straight financial numbers, UnitedHealth is in great shape. Yet those numbers, which are great news to investors; could become a political and public relations nightmare for the company.

A critic could easily charge that UnitedHealth made a lot of money from Obamacare exchanges then bailed from the business with the cash. This may not be true but it would be easy for a politician to spin it that way.

I am surprised that critics of Obamacare and single-payer advocates have not picked up on this, but I imagine that they will. Particularly with the profit that UnitedHealth shareholders will make. Shareholders were rewarded with a dividend yield of 1.52% and a return on equity of 18.01% on March 31, 2016.

This and the $12.91 billion that UnitedHealth has in the bank are going to look really bad to a lot of people. Particularly to all the lower income individuals in states like Iowa who lost their health insurance.

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Obviously, the failure of the exchanges; which are poorly designed and badly run, is not UnitedHealth’s fault. The company is to be credited for at least trying to make the program work.

Unfortunately, Democrats are going to need a scapegoat for the failure of their Obamacare experiment; and the big bad health company will make a great whipping boy. My guess is that it is only a matter of time before some Democratic politician goes on the warpath against UnitedHealth.

We are also likely to see some sort of legislation to either force UnitedHealth back into the exchanges; or tax it to pay for health insurance for the poor in the near future. Such a plan would be cheaper and easier than offering a real solution like single-payer healthcare.

Should Investors Dump UnitedHealth Group?

Naturally investors will be wondering if they should dump UnitedHealth Group because of this. I would say no, instead they should watch the news carefully.

UnitedHealth is making a lot of money from the current health insurance system. Particularly from employer-sponsored plans; which are mandated for companies that employ more than 50 people by Obamacare.

Unfortunately there is no guarantee that the status quo will last. My guess is that radical reform; probably in the form of an extension of Medicare to cover all Americans, is coming and soon. Average Americans are fed up with the health insurance system and they want change.

One person that investors need to watch here is Donald Trump, there is a strong possibility he will come out in support of single payer after he gets the Republican nomination. It’s the kind of radical off the wall move that Donald loves, and it would be popular. Naturally, Hillary would jump on the bandwagon, because it would be popular.

A big problem would be that both Trump and Hillary would propose such a plan, even if they knew Congress would vote no. All they care about is winning the presidency.

Investors need to realize that UnitedHealth Group is totally at the mercy of politicians and Congress. Its business could be destroyed by new legislation at any time. That means you should be ready to sell this company at any time, because its days could be numbered.

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