UNITEDHEALTH: AN ENVIABLE
TRACK RECORD OF GROWTH

UnitedHealth Group is the largest healthcare company in the US by revenue. Its UnitedHealthcare health benefits segment manages health maintenance organisation, preferred provider organisation and point-of-service plans, as well as Medicare and Medicaid, and supplemental vision and dental options. In addition, UnitedHealth’s Optum health services units Optum Health, Optum Insight and Optum Rx provide wellness and care management programmes, financial services, information technology solutions and pharmacy benefits management services to individuals and the healthcare industry.

UnitedHealth’s core business of health insurance has grown rapidly over the past 20 years through a combination of good organic growth (underlying health spend) and industry consolidation. Consolidation has helped to boost scale for the larger industry players and has seen the absorption of several non-profit providers, which have been the least disciplined from a price perspective.

In the US, most healthcare is sponsored by either employers or the government, the main government programmes being Medicare (mostly for the elderly) and Medicaid (for lower-income individuals).

DIVISIONAL BREAKDOWN

UnitedHealthcare accounts for more than 55% of revenue and 48% of the group’s profit pool. Its largest business is the Employer and Individual unit, which serves more than 26.7 million members through its plans for students, families, individuals and businesses ranging from sole proprietorships to multinational enterprises. The Medicare and Retirement senior services unit is the second largest business, serving around 7.1 million people through its Medicare Advantage products. A smaller unit, Community and State, manages public Medicaid programmes for disabled and disadvantaged citizens.

The Optum side of the business is an important profit driver for UnitedHealth, making up 52% of the group’s profit pool. Revenue growth for Optum should be rapid over the next few years, buoyed by the insourcing of pharmacy benefit activities. Prescription drug revenues worldwide are predicted to grow rapidly over the coming years – according to leading consulting firm Data Bridge Market Research, the global prescription drugs market is expected to be worth US$1 892.9 billion by 2030 – and we anticipate that Optum will participate in this dynamic.

STRONG GROWTH DYNAMICS

UnitedHealth has an enviable track record of consistent growth despite its shares being subject to notable headline risks due to the regulatory framework within which the group operates. This framework is designed to ensure that customers are provided adequate medical services while the companies offering these services don’t make superprofits.

Due to the significant barriers to entry for smaller players in this highly regulated industry, and because new capital entering the industry is limited, the returns on capital have been above 30% for companies like UnitedHealth. The biggest operators in the US health insurance industry take advantage of their economies of scale to provide both better pricing on their insurance policies and superior service delivery.

We believe the market continues to undervalue the strong cash flow and above-average growth prospects of UnitedHealth due to political headline risks, especially during election years, of which 2024 is one. Notwithstanding these risks, the group is targeting 6-8% revenue growth over the medium term and 13-16% earnings-per-share growth, including the positive impact of stock repurchase activities.

At the company’s annual investor day in November last year, it stated that ‘Optum Health expects to deliver consistent and durable growth in new and existing markets by offering integrated, comprehensive care and capabilities and accelerating our path to value-based care with an enduring focus on quality, affordability and service excellence. We expect to continue to deliver double-digit revenue growth on average and continue to target a long-term operating margin profile in the 8% to 10% range.’

In our view, UnitedHealth will experience short-term pressures on operating margins as:

• New enrolment numbers slow down this year
• Service utilisations in hospitals recover to pre-pandemic levels.

In our models we assume operating margin compression in the core health benefits business, but this will stabilise by next year as pricing improves and enrolment numbers settle back into the 3-4% annual increase rate. We expect the company to execute on the range of forecasts it set out at the investor day.

IN A NUTSHELL

UnitedHealth aligns with our investment philosophy at Sanlam Private Wealth of investing in high-quality companies with a leading market position at compelling valuations. Capital allocation is exemplary, with the group set to deploy capital through targeted acquisitions while seeking to maintain a market-leading dividend and ongoing share repurchase activity.

This is expected to contribute in the range of 3 to 5 percentage points to the annual earnings-per-share growth rate while offering an historic free cash flow yield of 5%. UnitedHealth anticipates that its business performance and capital deployment will yield a return on equity of 20% or higher – a level that in our view should lead to strong shareholder returns over time.