UnitedHealth Group shares have been stuck in a trading range recently as investors make sense of Obamacare's impact on insurers. However, that uncertainty might create an excellent opportunity for Foolish investors to buy the newest member of the Dow Jones Industrial Average.
The newest and the biggest
In September, UnitedHealth Group became the first health insurer to join the Dow. Health care is the biggest component of the American economy, and UnitedHealth Group is the largest single health insurance carrier in the United States -- and one of the most profitable.
The company tops its industry average for net profit margin. That results from business practices that focus on the most effective use of resources. As an example, UnitedHealth rewards doctors by paying them more for implementing more efficient practices, such as in-office treatments, which are much cheaper than utilizing a hospital but still helpful for patients.
UnitedHealth's sheer size also gives it potent purchasing power, allowing it to negotiate lower rates from doctors and hospitals. Those savings have a direct impact on the bottom line: They increase earnings and boost cash flows. As you can see from the chart below, UnitedHealth boasts one of the industry's strongest net profit margins and the best free cash return-on-asset ratio.
United Health Group
Free Cash Return-on- Assets
Net Profit Margin
Sources: Motley Fool CAPS and YCharts.
...With a sound capital structure...
UnitedHealth builds its capital structure on a basic business model. Insurance companies take in premium income, and then invest it. If all goes well, they have profits left over after they've paid all their bills.
The company's previously mentioned pricing power and economies of scale have allowed UnitedHealth to keep growing without taking on much debt. Notice its superior interest coverage ratio in the table below, which reveals how many times over UnitedHealth's earnings can pay for the interest on its outstanding debt. (The higher, the better). By keeping debt to a manageable level -- right in line with its industry average, as the table shows -- UnitedHealth has more freedom to expand, upgrade its operations, and devote its capital to profitable investments.
Interest Coverage Ratio
Sources: Motley Fool CAPS and Finviz.
... And a solid dividend framework
UnitedHealth is committed "to the forward development of its dividend policy." It's growing its dividend more than twice as quickly as the industry average. A robust framework of strong earnings and a low dividend payout ratio -- again, in line with the industry average -- help fund UnitedHealth's proliferating payouts, and suggest that shareholders can look forward to even bigger future dividends.
Dividend Payout Ratio
5-Year Dividend Growth Rate
Source: Motley Fool CAPS.
Concerns about the impact of Obamacare on the U.S. health care market, combined with tremendous growth opportunities abroad, are driving UnitedHealth Group to expand internationally. Last month, UnitedHealth bought 90% of Amil Participacoes, the largest health care network in Brazil with 5 million customers, 22 hospitals, and two more under construction. Demand for private health insurance is increasing in Brazil: From 2005 to 2011, those covered rose by a third. However, only one-fifth of the populace in Brazil has private health insurance, compared with about 80% in the United States.
UnitedHealth Group, through its core managed-care and Optum business lines, now has operations in North America, South America, the Middle East, and parts of Asia/Pacific, including China and India. As the biggest U.S. insurer, it should be able to achieve further economies of scale to reduce expenses and boost margins. This depth also allows it the financial firepower to take advantage of business opportunities of all sizes, from acquiring other companies to expanding the numbers of doctors and hospitals in its network.
Follow revenue and earnings per share growth
While an insurance company is a complex business, there's at least two metrics Fools should follow to determine whether UnitedHealth Group is healthy and growing. Management is projecting a double digit increase (12%) in revenue for 2013. From that, earnings per share are expected to rise by 3%.
If you are interested in UnitedHealth -- and you should be, as it is an excellent company with a shareholder-friendly dividend paradigm -- then read more about the prospects for UnitedHealth in a post-Obamacare world. The report also comes with a full year of analyst updates to keep you covered as key news develops, so don't miss out -- simply click here now to claim your copy today.
The article This Insurer Is Best of Breed originally appeared on Fool.com.
Fool contributor Jonathan Yates has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend UnitedHealth Group and WellPoint. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.