On Wednesday the country’s largest managed care provider—UnitedHealth Group (NYSE:UNH)—announced a significant—34 percent–dividend increase. While the company still has a relatively low payout ratio of just 27 percent, a dividend hike usually reflects management’s confidence in the future prospects of the business. With that being the case, is now the time to get on board and buy shares in UnitedHealth Group?
UnitedHealth Group is in an interesting situation from an investment standpoint. On the one hand, the company trades at just 14 times earnings, which makes it relatively inexpensive with respect to the rest of the market. It has also been growing its sales and its profits on a regular basis—just four years ago profits came in at $4.6 billion, and last year it came in at $5.6 billion. The company has been consistently raising its dividend and repurchasing shares. It has also been conservatively managed, as it carries just $14 billion in debt versus $80 billion in assets. For an $80 billion company this is compelling in a market where growth is difficult to come by and where price to earnings ratios are historically overextended.
On the other hand UnitedHealth Group is seeing its business directly impacted by the new Obamacare legislation. This legislation reduces government subsidized payments to well-being companies such as UnitedHealth, and this has taken a toll on the company’s earnings.