UnitedHealth Q1 Earnings Preview: Steady Profitability Growth, Attractive Dividend Increases in Focus

UnitedHealth Group is a globally leading diversified health and welfare company headquartered in Minnetonka, near Minneapolis, Minnesota, USA. As one of the world's largest health insurance providers, UnitedHealth Group is committed to optimizing the delivery and management of healthcare services through innovation, technology, and data analytics, enhancing patient health outcomes while offering clients efficient, convenient, and cost-effective health solutions. Let us now examine how the company's specific businesses will evolve in 24Q1 and identify key areas of focus for investors.

As a managed healthcare company, the size of its medical membership directly impacts UnitedHealth's total revenue, as insured individuals purchase various health insurance products from the company, generating cash inflows. As of Q4 2023, the company's total medical membership stood at 52.75 million, having achieved year-over-year growth for twelve consecutive quarters. According to Bloomberg consensus estimates, UnitedHealth's total insured population is expected to maintain an upward trend, with an estimated 53.90 million people insured in Q1 2024, representing a 1.93% year-on-year increase and a 2% quarter-on-quarter rise.

Chart: Growth Trend of Total Insured Population (in Ten Thousand)

Considering the positive impact of the continuously increasing total insured population on the company's revenue, we expect UnitedHealth's total operating revenue to experience growth. According to Bloomberg consensus forecasts, UnitedHealth's total revenue for 24Q1 is anticipated to reach $99.2 billion, reflecting a year-over-year increase of 7.92% and a quarter-over-quarter increase of 5.06%. Compared to the 14% year-over-year growth rate recorded in the previous quarter, the pace of revenue growth for UnitedHealth is projected to moderate in this quarter.

Chart: Growth Trend of Total Operating Revenue (in millions of US dollars)

Given the multitude of health insurance offerings and products provided by UnitedHealth, our analysis primarily focuses on two main segments: the Health Insurance Business Unit and the Optum Business Unit. Within these:

The Health Insurance Business Unit provides risk-based fee-for-service health insurance coverage to over 50 million people worldwide, enabling clients to access cost-effective healthcare services within designated care networks. Additionally, the division offers supplementary health insurance for seniors and manages Medicaid services on behalf of state governments.

Optum is comprised of OptumRx, OptumInsight, and OptumHealth. OptumRx provides customers with pharmaceutical cost containment, medication management, and pharmacy-related services; OptumHealth delivers healthcare services to patients through an outpatient facility network; and OptumInsight supplies data analytics, information technology, and consulting services to the healthcare industry. As of Q4 2023, the Health Insurance Business contributed 54% of the company's revenue for fiscal year 2023, while Optum accounted for 46% of total revenue.

Chart: Composition of UnitedHealth's Core Businesses

This department comprises four business segments, including employee and individual insurance, medical insurance and retirement, community and state government insurance, and global insurance. According to Bloomberg's consensus estimates, UnitedHealth's health insurance business is expected to generate revenue of $75.2 billion in 2024Q1, up 6.76% year-on-year and 6% quarter-on-quarter. Medical insurance and retirement business are expected to generate revenue of $35.2 billion, up 6.6% year-on-year and 8.6% quarter-on-quarter, accounting for 47% of total health insurance business revenue and the main driver of growth.

As the largest provider of MA healthcare plans, UnitedHealth's medical insurance and retirement business provide health insurance benefits to insured members through the MA plan in exchange for fixed premiums paid by CMS each month. As of December 31, 2023, the medical insurance and retirement business provided services to 7.7 million people through the MA plan, exceeding 20% of the total insured population.

Due to UnitedHealth's expected stable growth in the number of insured members, we expect the medical insurance and retirement business to continue to be the main driver of revenue growth in 2024Q1.

This department comprises three business segments, including Optum RX, Optum Health, and Optum Insight. According to Bloomberg's consensus estimates, the total revenue of Optum is expected to be $6 billion, up 10.98% year-on-year and almost unchanged quarter-on-quarter. The total revenue of Optum RX and Optum Health is expected to be $55.6 billion, accounting for 93% of the total revenue of the Optum department and the main driver of its business growth.

(1) Due to UnitedHealth's expansion of family services and deepening of the level and type of care, the number of patients serviced by the company's Optum Health increased by about 900,000 in 2023, reaching over 4.1 million. With the continued deepening of UnitedHealth's service level, we expect this business to continue to grow and bring considerable revenue. According to Bloomberg's consensus estimates, the revenue of Optum Health is expected to be $26.1 billion in 2024Q4, up 13.7% year-on-year and 6.5% quarter-on-quarter.

(2) Driven by the continuous increase of new customers, the expansion of existing relationships, and the organic growth of UnitedHealth's pharmacy service business, we expect the revenue of Optum Rx to continue to rise. According to Bloomberg's consensus estimates, the revenue of Optum Rx is expected to reach $28.9 billion, up 8.8% year-on-year and almost unchanged quarter-on-quarter.

UnitedHealth's operating expenses mainly consist of medical expenses and sales and management expenses:

Medical expenses: With the aging of the US population, the number of insured members through the MA plan is expected to continue to grow, and the increase in chronic diseases (diabetes, heart disease) and non-emergency surgeries will lead to more claims by insured members and an increase in UnitedHealth's medical expenses. According to Bloomberg's consensus estimates, UnitedHealth's medical expenses are expected to be $65.2 billion in 2024Q1, up 9% year-on-year. At the same time, due to the expected increase in the company's total revenue, the medical expense ratio is expected to remain stable at around 65%, consistent with the previous quarter.

Sales and management expenses: As UnitedHealth continues to expand its business in the health management market, such as Optum Health, and strengthen the operation of the Medicare Advantage business, we expect sales and management expenses to increase. According to Bloomberg's consensus estimates, this part of the expense is expected to be $14 billion in 2024Q1, up 3% year-on-year. At the same time, the medical expense ratio is expected to remain stable at around 14%, consistent with the previous quarter.

Overall, the company's expense control expectations are relatively strong. Although medical expenses and sales and management expenses have increased year-on-year, both expense ratios are expected to remain stable, which will not have an adverse effect on profitability.

Due to the expected increase in revenue and the effective control of expense ratios, we expect UnitedHealth's net profit to increase. According to Bloomberg's consensus estimates, UnitedHealth's non-GAAP net profit is expected to be $6.15 billion in 2024Q1, up 4% year-on-year and 6% quarter-on-quarter. The year-on-year growth rate of net profit has slowed down compared to the previous quarter, and the net profit margin is expected to increase slightly from 6.1% in the previous quarter to 6.2% this quarter. The company's profitability is expected to maintain stable growth. At the same time, the company's EPS is expected to be $6.59, up 5% year-on-year and up 6.7% quarter-on-quarter.

Chart: UnitedHealth Net Profit Changes (in millions of dollars)

As of 2023, UnitedHealth has consecutively raised dividends for 14 years. Its 10-year dividend growth rate stands at 21.4%. Considering UnitedHealth's current market size of $404.9 billion and its approximate 12% share in the US health insurance market, the persistence of dividend increases over 14 years by a company of this magnitude is highly appealing. By the end of March 2024, UnitedHealth's most recent dividend hike was nearly 14%.

Table: UnitedHealth Dividend Data

On the other hand, given a payout ratio of only 31.5%, we anticipate further double-digit dividend growth for shareholders in the coming years. This presents a favorable investment opportunity for those who prefer long-term growth and compounding over immediate high-yield satisfaction. Additionally, according to Bloomberg's analytical forecasts, due to the relatively low payout ratio, UnitedHealth's annualized dividend growth rate in 2024 is not expected to fall below 14%. Assuming no significant decline in PE, the combination of UnitedHealth's 1.6% yield and dividend growth could potentially yield double-digit annualized total returns for shareholders over the next decade.

As an outstanding health insurer, UnitedHealth is expected to maintain steady growth in performance, backed by rising enrollment numbers and the company's consistent dividend hikes. Under effective cost control, we anticipate steady profit growth for the company, along with an increase in EPS for 24Q1.

Notably, UnitedHealth's Change division faced a cyberattack in 2024, the company was subject to antitrust investigations by the Department of Justice, faced Medicare Advantage rate cuts, and saw intensified scrutiny of the PBM industry by the Federal Trade Commission (FTC), among other factors, leading to a stock price retracement during the first quarter. Some of these risk factors are already reflected in the company's current share price.

With expected stock price volatility in mind, how should options be traded?

The following chart depicts the current option holdings for UnitedHealth stock in the market. Investors can use this chart as a reference for risk hedging or arbitrage, making informed investment decisions accordingly.

Chart: Trading Volume of Call and Put Options for UnitedHealth Over the Past 30 Days as of April 12

Table: Top Five Option Trades as of April 12, Predominantly Bearish