HUM - 4 Reasons I Am Considering Adding Humana To My Portfolio

2023-04-26 06:35:45 ET

Summary

• Humana maintains a strong presence in the profitable Medicare Advantage market.
• Humana's investment in telehealth technologies will cut costs while improving service.
• Humana has a long track record of strong financial performance, with steady revenue growth and consistent profitability.

Investing Thesis

As the bear market continues to drag on, I am reminded of Lance Roberts's excellent article for Seeking Alpha outlining the possibility that we have entered a secular bear market. I cannot seem to shake the feeling that we are in for a long, drawn-out period of below-average returns and sluggish growth, which has led me to seek out some investments that might outperform the market while also offering a steady and growing stream of dividends. In an earlier article for Seeking Alpha, I considered Broadcom ( AVGO ) and Texas Instruments ( TXN ), reasoning that semiconductor stocks stood a good chance of performing well during these muddy economic waters. Today, I find myself looking at healthcare and insurance stocks, reasoning that they tend to offer three very important things for investors during less-then-stellar markets:

1. Steady demand : Since healthcare insurance is a necessity, the demand for healthcare services is unlikely to diminish anytime soon. As a result, good healthcare insurance providers tend to be relatively stable and predictable businesses. I like stable and I love predictable.

2. Potential for growth : As a large portion of the American population continues to age and healthcare costs continue to rise, there is a growing need for healthcare insurance providers. This need may well translate into potential growth opportunities for investors in the industry. While I usually seek out income over growth, I rather like the idea of finding an investment that can grow while most others are treading water.

3. Resilience to economic downturns : This is the big one for me. Healthcare insurance providers tend to be relatively resistant to economic downturns because people tend to prioritize healthcare spending even when they cut down on discretionary spending.

After some research, I settled in on Humana ( HUM ) as a particularly interesting candidate. Below, I outline the four reasons I am considering adding Humana to my portfolio.

Market Position

Providing coverage for upwards of twenty million Americans, Humana is one of the largest health insurance providers in the United States. Arguably Humana's most significant strength is the company's strong presence in the Medicare Advantage market, where it was recently named the best overall Medicare Advantage company , the best for member experience, and the best for low-premium plans by U.S. News and World Report. As the U.S. population ages, there is a growing need for reliable healthcare services for the ballooning number of seniors who are the primary customers of Medicare Advantage plans. Humana's position as a leader in the Medicare Advantage space suggests that the company will be poised to benefit from these population trends.

In addition to Humana's vaunted Medicare Advantage plans, the company also offers a variety of other health insurance products, including commercial group health insurance, dental insurance, and vision insurance as well as a range of healthcare solutions ranging from in-home health and hospice care to pharmacy services and wellness programs.

Telehealth Innovation

In the wake of the Covid-19 pandemic, Humana has been investing in new technologies and partnerships to improve the delivery of healthcare services and increase efficiency, particularly in the booming realm of telehealth. Humana makes use of telehealth technologies as part of its broader strategy to provide convenient and accessible healthcare services to its members, some of whom may live long distances from their doctors or who may face challenges in their mobility. In an effort to make medical care more accessible to such individuals, Humana has partnered with a range of telehealth providers to offer virtual care options, including Teladoc, Doctor On Demand, and MDLIVE. Thanks to these partnerships, Humana members can access virtual medical consultations with licensed healthcare providers using their smartphones, tablets, or computers. These virtual consultations can be used for a variety of services, including routine medical care, mental health counseling, and behavioral health support.

In addition, Humana also offers its own telehealth platform, dubbed Humana Virtual Visits, which is available to members in certain plans. This platform allows members to connect with healthcare providers for non-emergency medical consultations via video or phone.

In addition, telehealth offerings can help reduce healthcare costs by cutting down on in-person medical consultations and preventing unnecessary (and costly) emergency room visits.

Military Healthcare

In December, Humana issued a press release detailing the company's freshly-signed managed care support contract for the TRICARE East Region with the Defense Health Agency of the U.S. Department of Defense. TRICARE is a healthcare program of the United States Department of Defense Military Health System that provides important health benefits for active duty military personnel as well as retirees and their dependents. The program was established in the 1990s and provides a range of healthcare services for military personal. TRICARE is available worldwide and provides coverage to eligible beneficiaries both in the United States as well as in other countries. The program is managed by the Defense Health Agency, and there are several different plans and options available depending on an individual's status and location. With this contract, Humana will provide health care coverage and related services for an estimated 4.6 million active and retired servicemen and women and their dependents, including medical, dental, and mental health services.

Financial Performance

Humana has a long track record of strong financial performance, with steady revenue growth and consistent profitability. The company has also been returning value to shareholders through share buybacks and dividend payments. Over the past decade, Humana's share price has climbed from around $80 in 2013 to over $500 dollars today:

Significantly, Humana Inc.'s stock price has outperformed the market during the current bear market. Indeed, while Humana is up almost 13.6% over the past year, the S&P 500 ( SPY ) is down 5.23% during that same time span. Importantly, Humana's climbing share price has been accompanied by a healthy free cash flow and other strong financials. Among the most noteworthy of these figures are Humana's $83.65 billion in profits for the last fiscal year (a solid 7.7% increase), 3.5% profit as percentage of revenue, 18.2% profit as a percentage of shareholder equity, and a $1.62 earnings per share.

In terms of total return, Humana shareholders have enjoyed a 10 year annualized total return of 19%. Additionally, Humana has steadily hiked its dividend over the past six years:

While the $3.54 forward annual payment is a meager 0.71%, the low 12.50% payout ratio suggests that the dividend is extremely well-covered while the 13.82% annual growth rate suggests the company is committed to hiking the dividend at a rate exceedingly even the most red-hot inflation rates.

Concluding Remarks

I believe that Humana is a solid choice for investors seeking both growth and income, though the latter will likely not be knocking anyone's socks off anytime soon. Humana is a major player in healthcare, with well-established niches in Medicare Advantage and military coverage. The company's services are in-demand and an aging population will very likely keep the Medicare Advantage segment chugging along for some time. The company is profitable, the stock price has climbed steadily for the past decade, and the dividend is both growing and well-covered. Long term dividend investors will likely enjoy the combination of continued capital gains and a growing, if somewhat small, stream of income. I rate the stock a buy.

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