Cigna: Trimming The Fats And Staying Centered (NYSE:CI)

Concerning the Firm

The Cigna Group (NYSE:CI) is comprised of two segments, Cigna Healthcare and Evernorth Well being Providers (beforehand Specific Scripts). Cigna and Specific Scripts merged a couple of years in the past and created a vertically built-in firm the place Cigna Healthcare is targeted on medical health insurance for people, employers, and components of the federal government, whereas the Evernorth piece of the corporate is a pharmacy advantages supervisor.

Transactions and their Results

In recent times, Cigna Group has bought a number of components of the corporate to concentrate on its core enterprise. One instance occurred in 2020 when Cigna bought off its group life, accident, and incapacity insurance coverage to New York Life for greater than $6 billion. Moreover, in simply the previous month, Well being Care Service Company acquired Cigna’s Medicare enterprise in a deal valued at round $3.3 billion and is predicted to shut in 2025.

Following up on the newest divestiture, I feel it is necessary to analyze why they exited stated market. The Medicare Benefit transaction, which has but to shut, is attention-grabbing particularly contemplating what was said by Humana’s (HUM) CEO, Bruce Broussard, throughout their fourth quarter earnings name, “The Medicare Benefit sector is navigating a posh and dynamic interval of change as we’re all working by particular regulatory adjustments, whereas additionally absorbing unprecedented will increase in medical price tendencies.” In the identical paragraph, he goes on to state, “The rise in utilization that emerged late within the fourth quarter was a big deviation from an already elevated stage impacting the business.” Alongside those self same traces, after Cigna bought off the Medicare Benefit portion of their firm the CEO said, “His firm nonetheless sees Medicare as a beautiful market, however that enterprise required a spotlight and assets that have been “disproportionate to their measurement” throughout the firm’s portfolio.” All in all, each CEOs should not essentially sounding the alarm, however are shedding gentle on this space of the market and that it’s costing these firms greater than it ever has earlier than. Humana apparently has accepted the elevated prices, a minimum of within the brief time period, whereas Cigna reduce ties with the Medicare Benefit program altogether.

Monetary Metrics

As you possibly can see from the chart beneath, Cigna has been steadily growing their income over the previous 5 years. The largest improve was seen from 2020 to 2021 when income expanded by about 8.5%. Cigna’s income has a compound annual development fee of a little bit greater than 6% since 2019. In Cigna’s latest 2023 fourth quarter earnings presentation, 2024 income steerage was supplied, and the corporate tasks income will prime a minimum of $235 billion in 2024, a greater than 20% improve from their 2023 income of $196 billion.

Provided that Cigna has multiple section to the corporate, I all the time discover it helpful to interrupt out the income to see if there are any vital tendencies and to see which areas are rising and at what fee. First, the healthcare portion of the corporate has grown income at a decent 7.4% yearly over the previous 5 years, with the most important improve occurring between 2022 and 2023 when income elevated by nearly 14%. Alternatively, the Evernorth a part of the corporate has seen extra constant income development, starting from 6.3 to 13.4 p.c yearly since 2019. Additional, Evernorth’s income has had a compound annual development fee of virtually 10%, a couple of share factors higher than the Healthcare section. General, it’s encouraging to see each segments rising within the excessive single digits, and I see no purpose this sample mustn’t proceed.

Cigna has additionally completed a stellar job growing their earnings per share. Over the previous 5 years, earnings per share have grown at a compound annual development fee of greater than 10 p.c, with the very best improve coming between 2021 and 2022 the place earnings per share jumped 14.1 p.c. Moreover, Cigna has projected 2024 earnings per share to be a minimum of $28.25 per share, which equates to a rise of greater than 12.5%. Lastly, Cigna has been capable of develop earnings per share by share repurchases; over the previous three years, the corporate has managed to repurchase on common a web of 6.76% of excellent shares yearly.

The final monetary metric I’d prefer to concentrate on is Cigna’s working margin, which has struggled over the previous 5 years. In 2019, the corporate had an working margin of about 5.25%, it has since dropped to 4.37% in the newest fiscal 12 months. An organization’s means to extend or a minimum of preserve its working margin is necessary, which makes Cigna’s chart beneath considerably regarding. This metric is certainly value maintaining a tally of in case you are contemplating a place in Cigna or already maintain one.

The Dividend

Cigna has solely paid a significant dividend since March 2021 ($1.00), previous to that, the corporate paid an annual dividend of simply $0.04. In search of Alpha Quant, charges Cigna’s dividend security an “A+”, with its payout ratio hovering round 20-25% over the previous few years, which is in-line with administration’s purpose of round 20%. Moreover, Cigna has one of many higher ahead yields when in comparison with its friends, at 1.68%. Conversely, UnitedHealth (UNH) has a 1.54% yield, Elevance Well being (ELV) sports activities a 1.31% yield and Humana brings up the rear at simply 1.01%. It’s most likely a little bit too early in figuring out whether or not Cigna will develop into a dividend development inventory because it solely started rising its dividend lately; nonetheless, all indicators level to that coming to fruition.

Valuation

To find out if a inventory is presumably over or undervalued, I exploit two strategies. The primary is dividend yield idea, which relies on the premise that if the present yield is larger than its historic yield, the corporate is undervalued, and vice versa if the yield is decrease. The opposite extra frequent methodology is the value to earnings ratio, which is calculated by dividing the present value by the earnings per share for the prior twelve months. Whereas neither is an actual science, each are a fast technique to see if an organization is worthy of additional analysis.

As you possibly can see from the chart beneath, Cigna’s trailing dividend yield is effectively beneath its three-year common. Usually, I would favor to have a look at a minimum of 4 years, however as talked about above, they didn’t pay a big dividend till 2021. The corporate’s yield has fluctuated fairly a bit over the previous few years, briefly topping 2% in late 2021, and it didn’t attain that quantity once more till mid-2023. Alternatively, its lowest level was round 1.3% and occurred in late 2022.

The worth to earnings ratio has additionally fluctuated fairly a bit over the previous 4 years when in comparison with its common. Close to the start of the timeframe, you possibly can see the corporate’s p/e ratio was fairly low at simply above 8 and fluctuated considerably because of the covid impact. Nevertheless, a couple of 12 months after it reached that low, the p/e ratio topped 14, marking the second highest level on the chart, it was barely larger in December 2022. Cigna’s four-year common p/e ratio as of at present is 11.81, mixed with its trailing twelve-month earnings per share of $25.09 provides it an approximate worth of $300, this means the corporate is probably overvalued by about 10% at present ranges.

Dangers

The primary areas of concern might actually be lumped into one as they each revolve round authorities coverage adjustments throughout the healthcare business. In the course of the earlier presidential election cycle common healthcare was mentioned advert nauseum which, if it have been to ever happen, might have a big impact on Cigna’s enterprise and earnings. I might nearly view common healthcare as making medical health insurance firms like a utility, within the sense that it might be closely regulated with minimal room for materials development sooner or later. The second danger is the shortage of transparency in drug costs, which might have an effect on its Evernorth section. The Evernorth a part of the corporate negotiates drug costs with producers; nonetheless, drug value prices have been additionally underneath vital scrutiny over the past election cycle as effectively, for both being too excessive or simply unknown altogether. With the following presidential race nearly in full swing, it’s very potential each subjects develop into main factors of rivalry once more, particularly as the federal government seems to be to decrease healthcare prices, which might have an apparent detrimental impact on Cigna and its friends.

Remaining Ideas

Cigna has already seen a sizeable run up this 12 months, gaining a little bit greater than 12% within the first two months and inflicting the inventory to develop into barely overvalued, in my view. Nevertheless, over the previous few years, the corporate has trimmed among the “fats” and exited out of slower rising markets. I imagine this has and can permit the corporate to concentrate on the sooner rising features of its enterprise corresponding to industrial healthcare. Barring any vital authorities intervention, the corporate is effectively positioned financially and will provide strong inventory value appreciation and dividend development for the foreseeable future. I at present fee this firm as a maintain and if it have been to drop nearer to $300 I might be a purchaser.