Better Buy: UnitedHealth Group or Elevance Health?

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The two health insurers have shown resilience over the past couple of years, remaining profitable despite the pandemic, labor shortages, supply issues, and other issues affecting the economy. Our aging population only points in one direction for healthcare spending, and that's up, which is one reason why either of these stocks is a good investment.

UnitedHealth Group operates in all 50 states and 33 countries, serving 149 million members. The company also has a head start over Elevance in the trend toward keeping costs down and profits up by using its Optum health services business to steer UnitedHealthcare insurance patients toward its urgent care centers, surgery centers, pharmacy management, and clinics.

UnitedHealth's shares are up a little less than 5% over past year, and the stock trades at roughly 23 times earnings. It increased the number of people served by 1.2 million last year and in its fourth-quarter report said it expected another gain of at least 1 million this year.

The customer boost has driven earnings. The company reported 2022 revenue of $324.2 billion, up 13% over 2021, with its Optum and UnitedHealthcare divisions each seeing double-digit revenue growth. Full-year earnings per share (EPS) were $21.18, up 18.3% year over year. Optum served 4 million members in 2022. 

The healthcare company also reaffirmed its 2023 revenue projections of $357 billion to $360 billion and full-year EPS of $23.15 to $23.65 per share.

UnitedHealth has raised its dividend every year since it switched to a quarterly payout in 2010, including a 13.7% bump last year to $1.65 per share. At its current price, the yield is around 1.34%, a little lower than the S&P 500 average of 1.74%. The payout ratio is a very sustainable 26%. 

Elevance, which changed its name from Anthem last year, has seen its shares rise by a little more than 12% over the past year, and the company's stock trades at roughly 20 times earnings. Last year, it served 119 million members. The company's Anthem group operates in 15 states, and in the states where Anthem doesn't offer Blue Cross or Blue Shield plans, its commercial insurance and Medicare and Medicaid plans operate as Wellpoint.

Recently, the company's revenue and dividend growth have been more pronounced than UnitedHealth's, but its earnings have grown more slowly. In 2022, the company reported revenue of $156 billion, up 13.7% year over year, and EPS of $24.81, up 0.3 % over 2021.

This year, the company's guidance estimates yearly EPS of more than $29.80, up at least 20% year over year. The dividend's payout ratio is only 17%, so more dividend increases are likely. The company has raised its quarterly dividend for 12 consecutive years, including a boost this past year of 16% to $1.48 per share, equaling a yield of around 1.18%.

The company's Carelon division, formerly IngenioRx, is relatively new. Its addition allows Elevance to do more than just pay medical claims; the company can now also offer prescription drug benefits. Last year, Carelon was responsible for $40.8 billion in revenue, up 86.2% from 2021. The company said it is looking to add value-based deals through lump sum payments to treat more chronically ill patients.

UnitedHealthcare Group is more profitable and has a better dividend. Its Optum business is also much larger than Elevance's Carelon division.

However, my vote goes to Elevance because it has a greater potential for growth as it beefs up its Carelon division, plus its dividend is growing faster and has more room to grow because it has a lower payout ratio. Based on its earnings, it's also trading at a little bit more of a discount to UnitedHealth.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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