Shares of UnitedHealth (NYSE: UNH) are down in the wake of the Q2 earnings release but this is an opportunity for investors to get some more of these shares at a discounted price. The move is driven, in our opinion, by the expected year-over-year decline in earnings caused by COVID so shouldn’t last long. While the company’s revenue is on the rise its medical care ratio is also on the rise and cutting into profits. What investors need to focus on is the fact that medical care expenses were in line with the consensus estimate and the peak of COVID is now well behind us. As we move forward, we expect medical care costs to begin falling sharply in the third quarter and drive improved profitability in the second half of the year.
UnitedHealth had a great quarter and we can’t fault it for the increase in medical care costs. As a healthcare insurer, it is uniquely positioned to incur costs related to the pandemic. Things could have been worse. That said, the company’s $71.30 billion in consolidated revenue is up 14.7% from last year and beat the consensus by 250 basis points. This is also the fourth quarter of sequential revenue gains and revenue is up 17.7% from the same time frame two years ago. On a segment basis, the company experienced double-digit gains in both the Optum and UnitedHealth arms of the business. UnitedHealth saw revenue increase 13% while Optum leads with an increase of 17.2%.
Moving down towards profitability metrics, the company’s Medical Care ratio surged 12.6% to 82.8% over the past year but came in roughly in line with the consensus of 82.7%. As for operating cost, the operating cost ratio of 14.5% matches the consensus exactly. The bad news is that adjusted and GAAP earnings fell in the range of 35% from last year, the good news is that GAAP EPS of $4.46 and the adjusted EPS of $4.70 both beat the consensus by a quarter dollar.
Looking forward, the company is expecting earnings to improve if not for revenue and has raised its guidance for both GAAP and adjusted EPS. UnitedHealth is now expecting an adjusted EPS of $18.3 to $18.80 versus the prior $17.15 to $17.65 with a similar increase to the GAAP guidance. This compares to the consensus estimate of $18.58 and we think that it is conservative guidance. Results in the first half of the year are already worth 55% of the guidance and we are expecting revenue strength to continue as well as improved profitability.
United Health is not one of the higher-yielding dividend growth stocks that we follow but it is among the safest and comes with a very attractive growth outlook. At current price levels, the stock is yielding about 1.4% but comes with a 31% payout ratio, 12 years of increases, and a 20% distribution CAGR. The last increase was worth 16% so it’s possible the pace of distribution increases will slow but that is offset by better-than-expected earnings. In our view, investors should be looking for a 15 to 20% increase when the distribution is raised again at the end of the fiscal year. And the balance sheet is a fortress so there’s no worry there.
Shares of UnitedHealth fell in the wake of the Q2 earnings release but investors are already scooping up the deal. Early price action moved down to test support at the short-term moving average and support is already kicking in. At this time, it looks like a nice trend-following bounce is in play, the only caveat is that this candle has yet to close so price action could look much different by the end of the day. Assuming the stock closes near the high of the session, we see this stock Moving at the set a new all-time high very soon.
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