Record Results Lift UnitedHealth To New Highs
UnitedHealthcare (NYSE: UNH) has been one of our top choices among healthcare stocks for some time. The company is well-run, growing, and pays a healthy dividend so what is there not to like? The addition of Optum to the fold only optimized that outlook and driven revenue growth well above the analyst expectations. The trend now is for the company to beat the consensus estimate by over a billion dollars per quarter and the fiscal Q3 results have prolonged that trend. In our view, if you're looking for a place to invest some money in the healthcare sector UnitedHealth is a great choice. Not only does the yield beat the broad market average but it's a safe payout and one with a very positive outlook for growth.
UnitedHealth Smashes Consensus Estimates
UnitedHealth had a great quarter with strength carrying through from the top line all the way to the bottom. The company reported $72.37 billion in net consolidated revenue for a gain of 11.1% over last year. The revenue also beat the Marketbeat.com consensus by 150 basis points or $1.09 billion which we think is significant for a company of this size and visibility. The company reports double-digit strength in both the Optum segments and the core UnitedHealth segments with growth of 13.9% and 11% respectively.
Moving down, the company reports a medical care ratio of 83% which is up slightly from the previous quarter and from last year but beat the consensus by 60 basis points. That's good. This is offset by a 50 basis point increase in operating cost which left the operating margin at 7.9%. The 7.9% operating margin is slightly better than expected and drove solid results on the bottom line. The GAAP earnings of $4.28 beat the consensus by $0.08 while the $4.52 in adjusted earnings beat the consensus by a dime.
Turning to the guidance, the guidance is favorable but there is a caveat. While the new high-end for EPS is $18.90 compared to the previous $18.80, the consensus estimate is $18.76 and still within the guidance range. We do see upside risk and expect to see EPS at the high end of the range but the improved guidance is only roughly in line with the expectation.
UnitedHealth Is Healthy For Your Dividend Portfolio
UnitedHealth pays 1.45% in yield which we think is a bit low compared to some other stocks we could buy but the payout is very safe and being grown aggressively. The payout ratio is running about 30% of earnings with earnings outpacing the consensus estimate and there is a history of aggressive growth. The company has been raising the dividend annually for the past 12 years with a 20% CAGR over the last five so we do expect large distribution increases to continue. The balance sheet is rather strong, too, with some debt on it but also a high level of cash, a very low leverage ratio, and ample coverage and free cash flow. If anything, investors might expect the pace of dividend increases to slow but we don't see any evidence of that right now.
The Technical Outlook: UnitedHealth Is On Breakout Alert
Shares of UnitedHealth jumped more than 5% at the open to create a large window and open near the top of the recent consolidation range. Price action moved up to set a new high but, during mid-day action at least, move lower to confirm resistance at that level. The move is accompanied by bullish indicators and positive news so we do expect to see price action continue higher. The caveat is that, at least for now, there is a chance of a shooting star candle being formed and that could cap games in the near to midterm. Assuming price action is able to consolidate at this level and establish a base, we would expect to see it move up to new all-time high territory and to the range of $460.
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