In business, a monopoly is like a license to print money. In fact, a monopoly gives a business such an advantage the government has made it illegal.
But one company has just recently created its own monopoly and it could mean big money for investors.
When John D Rockefeller built up Standard Oil to control 90% of the oil industry, creating a giant monopoly, the government passed the Sherman Antitrust Act in 1890 to bring down the kind of power that comes from monopoly control. For over 100 years, the antitrust laws have been applied to every industry from oil to sugar, tobacco and steel.
The government fears the power of a monopoly so much that it’s one of the few regulatory laws with criminal prosecution, a fine up to $100 million and 10 years in prison. In just over ten years to 2009, nearly 250 individuals and 143 organizations were convicted under antitrust laws, the individuals alone were sentenced to more than 62 years in prison and up to $7.5 million in fines.
The Biden Administration has launched a revolution in antitrust cases, bringing complaints and blocking dozens of deals in the first year alone. Just this year, Nvidia was set to extend its domination in semiconductors by acquiring processor innovator ARM…until the government shut down talks.
But when the government loses these cases, investors stand to win big time!
This video is the story of the government’s most recent loss, the monopoly it creates and the upside for investors of one company.
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UnitedHealth Group, ticker UNH, is already the largest health insurer in the United States with medical benefits that cover 50 million members globally. It’s also a leader in pharmacy benefits and health analytics. The company counts a market share of 15% of the U.S. health insurance market by premiums, more than any other competitor by a wide margin. It fills 1.4 billion of the six billion prescriptions in the U.S. annually. That’s almost one in every four prescriptions in the country.
That kind of vertical integration of the healthcare industry, from insurance to pharmacy benefits to services gives UnitedHealth a unique advantage and the ability to control healthcare costs in its system. It helps boost the company’s profitability and has helped drive a 21% annual return for shareholders over the last five years.
And beyond all this, it just got what could be inside information into its competitors in a deal to acquire Change Healthcare.
Change provides financial and administrative services to health insurers, giving it an inside and intimate look at each company’s reimbursement policies. Change knows every detail into UnitedHealth’s competitors from billing to patient care. You get a sense of this scale from its website. The company helps health insurers with payment accuracy, medical records and ultimately with payment decisions. It has intimate detail into providers, hospital services, about their revenue, payment information and networks. A big reason why the American Hospital Association was one of the first to protest the UnitedHealth acquisition, fearing all that information would then go to the insurer. It also provides pharmacy solutions and holds data around that.
In fact, through its services Change manages a third of U.S. healthcare claims across over 2,000 government and commercial payers. It has access to one-in-five of all patient records and data on over 5,000 hospitals business decisions. Basically every customer and competitor of UnitedHealth, Change is now going to bring that data to the company.
The Biden Administration sued to block the deal in February. The Justice Department’s argument was that the deal would give UnitedHealth a monopoly through its access to Change Healthcare’s data clearinghouse which rival insurers use to compete. The American Hospital Association was also heavily involved fighting the acquisition.
The government and other industry players believed the deal would give UnitedHealth an unfair advantage, not just over health insurance competitors but also in negotiating with health providers and drugmakers…and now they will get a change to see if they were right.
That’s because last month a federal judge ruled against the government’s case, saying the acquisition could proceed. UnitedHealth is being required to sell off its claims-processing segment so the combination doesn’t create too much of an unfair advantage but there is still a lot to like for investors.
Now UnitedHealth will have access to data its competitors used to make business decisions, basically giving it an inside view on how Humana, Anthem and Cigna run their companies.
What does this mean for investors?
UnitedHealth has grown sales by an 8.2% pace over the past three years but this deal is expected to increase that to 10% or more through 2025 to more than $424 billion. While the company’s sales growth is under competitors like Centene, UnitedHealth has the strongest profitability in the group with an operating margin of 7.6% and it’s likely this deal makes it even more profitable. That 10% sales growth may not seem like much, especially not when you consider growth of twenty- and thirty-percent on some of the tech stocks we’ve talked about but consider this, it’s nearly twice the rate the overall health insurance market is expected to grow.
Think about what that means. If UnitedHealth’s main market is only expected to grow by about 5.5% a year but the company is expected to post 10% sales growth, that means it’s likely taking market share from competitors. Not only does that mean higher earnings but it can then use that market dominance to increase profitability.
In fact, I don’t think investors or the market really understand yet how beneficial this deal will be to UnitedHealth’s profitability or its ability to take business from other insurers.
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Now United will know its competitors’ business policies, potentially being able to undercut them in insurance and other services. It will be able to use its scale and this competitive advantage to squeeze others out.
The acquisition is expected to boost earnings by $0.50 per share immediately and the company is expected to post 14% earnings growth annually to $32.75 per share in 2025.
UnitedHealth already spends $5 billion a year repurchasing its shares and $5.2 billion in dividend payments to investors. Now a 1.3% dividend yield isn’t great but UNH has increased its dividend payout by 17% a year over the last five, from just $0.75 to $1.65 a share. It’s also on top of the share price, producing a 21% annual return over the last five years. That’s a 163% return and more than two and a half times the return on the overall stock market.
A lot of you growth investors are saying, an insurance company is never going to make me rich. Any industry expecting just 5% market growth, even if the company is expected to double that, it’s not a stock that is going to shoot higher.
And you’re right…but it’s also not a stock that will lose your money. Everyone needs health insurance and the company’s cash flows are extremely stable no matter what the economy does.
Here’s UnitedHealth after the tech bubble burst in 2000, beating stocks in the S&P 500 by 195% over the next two years. And here’s what the stock has done over the last year, protecting your money from a loss in stocks and actually producing a 29% return.
The shares got hit during the crash of 2008 because of what that crash did to all finance and insurance companies but has produced a 29% annual return over the 23 years since that bottom.
On valuation, the company posted $20 a share earnings over the last year which puts it at a price-to-earnings of 25-times. That’s slightly above the 22-times price-to-earnings average over the last five years according to Morningstar. It’s the same valuation as Centene but over the 20-times PE ratio on Humana, so the shares aren’t cheap here but not necessarily expensive either. We see that the PE ratio was as high as 31-times at the peak in 2021 but I don’t expect it to get back to that point soon, especially not with stocks struggling.
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Even if the PE valuation is topped out, just earnings growth plus the dividend could make it a 15% return per year and that growth may still underestimate the benefits of the acquisition. Analysts have an average target of $593 a share over the next year. That’s a 15% return and the top target is as high as $650 each.
On that forecast for $32.75 in per share earnings through 2025 and no change in the price-to-earnings ratio, the shares are worth $818 each over the next three years. That’s a 61% total return plus the dividend yield which again, that dividend payment has increased at a 17% rate over the last five years so you’re going to be collecting a higher yield on your investment. In today’s market and stock uncertainty, that monopoly power is going to be worth a lot!