Humana (NYSE: HUM) has been in the news lately with its failed merger with Aetna. When a merger between two companies fails, usually the stock prices of the companies drops as shareholders bid up the price hearing the news about a potential merger, anticipating the merger would go through.
But that didn’t happen with Humana. In fact, the opposite happened and shareholders have continued to buy more shares of this health insurer.
Are you missing out? Should you look into Humana to see if it is a fit for your portfolio? Or are you better off waiting for the stock to cool off before adding a position?
Humana didn’t start out as a health insurer. It started out as a nursing home company back in 1961. In the early 1970’s, the two founders, David Jones and Wendell Cherry sold the nursing home segment to focus on building hospitals.
By the 1980’s Humana was the largest hospital company in the world. In fact, the modern design of hospitals today where patient rooms are on the perimeter of the floor and nursing stations are centralized, was created by Humana.
As the 1980’s progressed and healthcare changed in the United States, the company created its own health insurance plan. As the health insurance business grew, they sold off their hospital stake in 1993 to focus solely on insurance.
Since that time, Humana has grown to become one of the top 5 largest health insurers in the United States.
The Economics of Humana
With Humana pulling out of the healthcare exchange and no longer offering insurance to individuals, the company is instead focusing on two areas. The first is employer plans. They will continue to offer insurance coverage to individuals through employer sponsored health plans. The second area of focus is on senior citizens and Medicare.
With the US population of baby boomers aging, this segment is a key growth area for Humana. And the company expects to grow handsomely as a result. For 2017, they have set their guidance for earnings per share to $10.80 to $11.00.
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Beyond 2017, the company will complete its pullout of the Affordable Care Act and will begin to focus on strategic investments throughout the healthcare space. With a current debt to capital ratio of just under 20%, they have room to take on more debt through acquisitions and not harm the growth of the company long term.
Humana has stated it is comfortable raising the debt to capital ratio to between 30-35% and going higher if the right acquisition presented itself.
Is Humana A Buy?
It’s no surprise that we are in an unknown time when it comes to healthcare in the United States. Everything changed back in 2010 when the Affordable Care Act became law. Now, everything is up in the air as President Trump has repeatedly said he plans to scrap the Affordable Care Act and start anew.
Even with this uncertainty, you wouldn’t know it by looking at the recent performance of the company stock. Since President Trump was elected, the stock price has soared from $175 a share to over $205 a share. It is clear that investors think that scraping the current health insurance system and starting over is a good thing.
So should you consider buying Humana?
As it stands now, the failed merger between Humana and Aetna is a good thing for both companies. Humana in particular has a plan for growing its business in the coming years and has made clear that other capital investments are likely.
In addition to the above, the company is reinvesting in itself and rewarding shareholders at the same time. They announced a share buyback program of $2 billion through 2017. They have also increased their dividend from $0.29 per share to $0.40 per share, which is close to a 40% increase.
With the stock price shooting up since November, it is currently trading at 50 times earnings per share. Other large health insurers are much less expensive when looking at this metric.
As a result and taking everything into consideration, it would be in your best interest to wait for a pullback in the stock price before jumping in. Humana has big plans and is committing itself to returning profits to its shareholders. However investors seem a little too excited for the future prospects of the company and as a result have the stock overpriced.
This author has no positions in any stock mentioned and does not plan to open any positions in any stocks mentioned for at least 72 hours after publication of this article.