The Best Stocks To Invest in Health Insurance

By Markets Fool.com

Continue Reading Below

Source: Anthem

The health insurance industry may not be as interesting to investors as biotechnology, but insurers' steady-eddie nature could mean that they're the perfect addition to long-term portfolios. Thanks to an aging population that is eager for new insurance products and healthcare reform having led to millions of Americans getting coverage, the health insurance industry has been thriving.

UnitedHealth Group, Anthem, and Humana have been among the insurers enjoying the biggest success, so let's see if it may make sense to hold them in your portfolios.

No. 1: UnitedHealth Group
UnitedHealth Group's members include people who are enrolled in plans offered through both employers and healthcare exchanges. UnitedHealth also offers Medicare Advantage and supplemental Medicare products to seniors, and it administers Medicaid programs for various states. Overall, UnitedHealth serves more than 45 million people -- making it both the nation's largest health insurer and a core holding among healthcare investors.

In the past year, UnitedHealth's revenue grew 7% year-over-year to a staggering $130.5 billion. Of that, Medicare and seniors products accounted for $46.3 billion in sales, commercial and individual products accounted for $43 billion in sales, and Medicaid and other state programs represented $23.6 billion in sales. The remainder of UnitedHealth's revenue came from its international business, which operates in Brazil, and its Optum Health analytics segment.

Continue Reading Below

Although UnitedHealth generates a significant amount of revenue every year, insurers are notoriously low margin businesses, and UnitedHealth is no exception. UnitedHealth's operating margin was just 4.3% last year. However, despite thin margins, UnitedHealth's net earnings still totaled $5.6 billion in 2014, leading to EPS of $5.70, which was up from $5.50 in 2013.

Those are solid results, but this year could be better; UnitedHealth took a tepid approach to participating in the exchanges in 2014, but it's all-in this year, with plans offering in 23 states.

Given that 11.7 million people have signed up for health insurance through the exchanges for 2015, UnitedHealth's commercial and individual business revenue should pop. As a result, UnitedHealth is guiding investors to expect revenue of between $140.5 billion and $141.5 billion in 2015 and EPS growth of at least 5% to a range of $6 to $6.25. If UnitedHealth can put up those numbers, then it should have plenty of financial flexibility to continue rewarding investors with buybacks and dividends. Last year, UnitedHealth repurchased $4 billion in stock, and returned $1.4 billion to shareholders via dividend payments, a level of shareholder friendliness that could make it one of the best health insurers that investors can buy.

No. 2: Anthem
Although Anthem may not be as big as UnitedHealth, it's still a health insurance powerhouse.

Unlike UnitedHealth, Anthem jumped into the exchanges with both feet last year, offering plans in 14 states. As a result, membership in Anthem's plans jumped by 1.8 million people year-over-year last year, leading to sales growing by 6.4% to $18.78 billion in the fourth quarter and by 4% to $73.02 billion for the full year.

Although exchanges helped boost membership last year, Anthem's Medicaid business was its best performer. Thanks to a presence in states that adopted Medicaid expansion, government plan revenue increased 9.9%, and government plan profitability jumped by 41% last year. As a result, a healthy operating margin of 6.1% resulted in EPS of $8.85 in 2014.

Anthem is facing a bit more competition on the exchanges this year, but it still expects that pricing and new members will produce revenue growth. Anthem expects to deliver operating revenue of between $78 billion and $78.5 billion and EPS of $9.70 this year. If it can match that frothy EPS projection, it would mark a 9.6% advance from 2014 -- pretty darn impressive for a big insurer!

No. 3: Humana
While UnitedHealth and Anthem get a lot of their revenue from employer and individual plans, Humana gets the lion's share of its revenue from selling Medicare Advantage plans.

Humana serves 2.45 million people through its Medicare Advantage plans, and that membership has grown by a compounded annual rate of 16% since 2012. As a result, Medicare Advantage represents about 54% of Humana's sales, or $25.9 billion last year. The company also gets $3.4 billion from selling prescription drug plans, $3.3 billion from selling individual plans, and $1 billion from running state Medicaid plans. In addition to revenue tied to government programs, Humana also generates $12.3 billion in sales from employer-based group plans.

Since Humana is more tightly tied to Medicare, it stands to benefit from the fact that 10,000 baby boomers turn 65 every day. However, it also means that Humana is more exposed to the whims of government spending. As a result, Humana may be best suited to investors who expect that membership growth will outstrip any potential risk from falling Medicare payments to private Medicare insurers.

Tying it together
These companies aren't going to see their sales soar like growth companies, but they are likely to put up solid annual growth rates that are sustainable. Pricing remains a threat, especially given rising drug costs, but for now, those expenses are being digested by cost cutting and price increases. As long as that continues, these three companies are likely to remain the industry leaders, and that means that each could be deserving of a spot in portfolios.

The article The Best Stocks To Invest in Health Insurance originally appeared on Fool.com.

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. The Motley Fool recommends Anthem and UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.