3 Top Medicare Companies to Buy in 2017

By Keith Speights Markets Fool.com

As the baby boomer generation ages, one outcome seems certain: Medicare enrollment will continue to grow. That's concerning for the U.S. government, which must deal with higher Medicare costs. But for several companies, more people enrolled in Medicare is a very good thing -- especially if those individuals choose Medicare Advantage plans.

Continue Reading Below

Three of the top Medicare companies are UnitedHealth Group (NYSE: UNH), Humana (NYSE: HUM), and Aetna (NYSE: AET). Together, the three health insurers covered 46% of Medicare Advantage members in 2016. Here's why the stocks continue to look like good picks this year.

Image source: Getty Images.

UnitedHealth Group: The Big Gorilla of Medicare

The nation's largest health insurer, UnitedHealth Group, also ranks as the largest provider of services to Medicare members. UnitedHealth covered 3.6 million Americans with its Medicare Advantage plans last year, 21% of the total number of individuals in Medicare Advantage.

UnitedHealth didn't just focus on Medicare Advantage. The company reported 8.6 million people in its Medicare Part D prescription drug plans at the end of 2016. In addition, UnitedHealth covered 4.7 million seniors through its Medicare supplement plans offered in association with AARP.Roughly 25% of the insurer's total revenue in 2016 came from theCenters for Medicare and Medicaid Services (CMS), most of which came from Medicare-related products.

Continue Reading Below

Over the past three years, UnitedHealth Group's stock has been the top performer among large health insurers. A big reason behind the stock's success is continued strong growth from the company's Optum business segment, which includes the OptumRx pharmacy benefits management (PBM) unit.

Higher Medicare enrollment combined with Optum's momentum should enable UnitedHealth Group to grow earnings by more than 15% annually over the next five years. The company's dividend yield currently stands at 1.52%. UnitedHealth's strong growth prospects plus a decent dividend make the stock a compelling buy for long-term investors.

Humana: Moving on after merger collapse

Humana provides individual Medicare Advantage coverage to more than 2.8 million members plus group Medicare Advantage to another 355,000 people. This coverage represents 18% of the total number of Americans with Medicare Advantage.

Over 4.9 million individuals purchased Medicare Part D prescription drug coverage from Humana in 2016. The company also provided Medicare supplement plans to nearly 219,000 Americans. Overall, Medicare generated 87% of Humana's total premium and services revenue last year.

Thanks in part to a merger bid from Aetna, Humana's stock trailed only UnitedHealth Group in performance over the last three years. However, the deal was called off after a federal court blocked the merger on concerns that it would reduce competition.

Humana should be able to grow earnings by more than 13% over the next five years. Its reduced participation in the Obamacare exchanges should help boost the bottom line.Although Humana's dividend yield of less than 1% isn't as strong as some of its peers, the company seems well positioned to increase the dividend down the road.

Aetna: Bragging rights for quality

Aetna covers nearly 1.4 million Americans through its Medicare Advantage plans. That makes the company the No. 3 Medicare Advantage provider, with 7% of the total market. Aetna also claims bragging rights for the highest percentage of members in Medicare Advantage plans with at least four stars in the government's star rating program evaluating plan quality.

The insurer's membership includes another 3 million individuals enrolled in its Medicare Part D prescription drug plans plus 685,000 people buying its Medicare supplement plans. Over 43% of Aetna's total revenue in 2016 stemmed from government programs, with Medicare generated a substantial portion of that revenue.

Aetna's stock performance over the past three years has lagged behind that of UnitedHealth Group and Humana. However, the stock has nevertheless racked up significant gains. The termination of the planned merger with Humana doesn't appear to have hurt Aetna's share price much. However, Aetna did agree to pay Humana $1 billion in cash as part of the two companies' termination agreement.

Over the next five years, Aetna should be able to grow its earnings by close to 14% annually on average. Like its peers, the company is reducing its participation in Obamacare exchanges dramatically, a move that should improve profitability. Aetna should also continue to experience strong growth with its Medicare Advantage plans. This growth, combined with Aetna's dividend yield of 1.57%, should make the stock a winner for investors over the long run.

10 stocks we like better than Aetna
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Aetna wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of April 3, 2017

Keith Speights has no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.