Navigating public backlash, controversy and a challenging business environment, health insurance giant UnitedHealth Group (NYSE:UNH) has lost 47 percent of its value over the last 12 months.
However, the stock recently picked up a surprising supporter in Warren Buffett’s Berkshire Hathaway conglomerate, which purchased a little over 5 million UNH shares in Q2. Today, let’s look at some of the possible explanations for why Buffett bought UNH stock.
UNH’s Low Valuation and Large Moat
One of the first things that stands out about UNH from Buffett’s typical value investing perspective is the low price the stock trades at relative to its performance. With prices today still comparable to Berkshire’s average cost basis, UNH is currently trading at a P/E of 13.4 and a price-to-operating-cash-flow ratio of 11.3. With the stock having fallen by nearly 50 percent in the last year, UnitedHealth’s P/E ratio is now far below the sector average of 23.7.
It’s interesting to note that UNH still has attractive qualities as a business in spite of its falling prices. Though UnitedHealth’s net margin is fairly low at 5.2 percent, it boasts significantly higher returns on both equity and invested capital at 21.4 percent and 12.1 percent, respectively.
Another feature of UNH that likely appeals to Buffett is its impressive market position. UnitedHealth is the largest health insurer in the United States. The business’s customer base, 90 percent of which is domestic, totals around 52 million people. UnitedHealth is also the largest provider of Medicare Advantage plans, tying it directly to the health benefits of millions of Medicare recipients.
UnitedHealth’s moat goes beyond its sheer scale thanks to its unique vertical integration model. By integrating health insurance and health services together as part of a single business, UnitedHealth has managed to become a uniquely positioned healthcare giant with economic advantages over its competitors.
It’s worth noting that UnitedHealth is increasingly seeing pushback to this model from both regulators and consumers, but the advantages it provides may be worth the risk as long as regulators don’t move to break the business up.
UnitedHealth’s Balance Sheet
Buffett is also known to look for a strong balance sheet when evaluating potential investments, something he would have found in UnitedHealth. As of the most recent reporting, UnitedHealth’s balance sheet featured total liabilities of $203.8 billion, including total debt of $79.2 billion.
Though high, the liability total is far below the total assets of $308.6 billion on the other side of the balance sheet. This included $93.7 billion in current assets.
Use of Cash Benefiting Shareholders
A final positive for Berkshire Hathaway when evaluating UnitedHealth is the fact that management habitually uses the cash generated from its insurance business to fund both dividends and share buybacks.
Starting with the dividend, UNH shares currently yield 2.8 percent, and management has been able to keep the payout growing for 15 consecutive years. Even with some strain on earnings, it doesn’t appear that UnitedHealth will likely be compelled to cut its dividend anytime in the near future.
Share buybacks have also been fairly aggressive, with management allocating multiple billions of dollars to repurchasing shares in each of the last three quarters. This not only benefits current shareholders whose positions are concentrated through buybacks but also shows that UnitedHealth’s management has likely come to view its own stock as being undervalued at its depressed prices.
UnitedHealth’s Near-term Difficulties
Although UnitedHealth does have several appealing characteristics, it’s also important to understand that the business is facing its fair share of challenges. In addition to being a lightning rod for criticism of the health insurance business in general, UnitedHealth is also facing the same problems of lower margins and higher costs that many other insurers are dealing with.
These factors are expected to weigh heavily on earnings this year, with management’s guidance calling for EPS of $14.65 against the trailing 12-month total of $23.08. Prior to establishing this guidance alongside Q2’s report, management had withdrawn guidance for 2025 altogether.
It’s also difficult to ignore the regulatory challenges that UnitedHealth could face going forward. The business is already the subject of a DOJ investigation into its Medicare practices, and multiple lawmakers have accused it of predatory and anti-competitive practices.
In December of last year, a bill was even introduced in Congress that would have forced UnitedHealth to sell off parts of its vertically integrated business. Given that UnitedHealth has become the target of many Americans’ anger over the current state of health insurance, it’s far from difficult to imagine future efforts being made to constrain the business through regulatory means.
Why Buffett Bought UNH Stock
Overall, the decision to buy UNH seems fairly straightforward from Buffett’s perspective. The business, which is currently facing short-term headwinds, has sold off to a degree that could make it significantly undervalued.
Even with some fairly large risks baked in, UnitedHealth still has a wide moat and a strong balance sheet, potentially making it less risky as a long-term holding than the market at large believes it to be. Buffett may also have been drawn to the chance to buy such a large insurer at a discounted price, as he has both a deep understanding of and a long-standing affinity for the insurance business.
Finally, it’s worth noting that the decision to buy UnitedHealth may not have been made by Buffett personally. Historically, Buffett has preferred to deploy large amounts of cash when he identifies potentially undervalued stocks. The $1.6 billion Berkshire Hathaway has invested in UNH is quite small compared to the hundreds of billions of dollars in its cash stockpile. Buffett is also in the process of turning Berkshire over to his successor, Greg Abel.
As such, it’s possible that either Abel or one of Buffett’s other proteges made the decision to buy UnitedHealth. Even if that is the case, though, it’s very likely that the same models Buffett has used to drive his investment decisions for decades would have been applied to UnitedHealth.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.