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Why UnitedHealth Is the Only Healthcare Insurer To Own

UNH Chart
UNH Chart

UNH data by YCharts .

One major reason ACA premiums soared is that other insurers, such as Aetna and Humana (NYSE: HUM) , are also in the process of reducing or eliminating ACA coverage in many states. But UnitedHealth is so far ahead of the game that it raised the possibility of stronger profit growth in 2017, something no other insurer can boast. UnitedHealth also upped guidance on full-year 2016 earnings to $8 per share in its Q3 earnings, versus a previous view of $7.80-$7.95 per share. In addition, the company's reported net profit rose to $1.97 billion, or $2.03 per share, from $1.6 billion, or $1.65 per share, a year earlier.

While this all signals further strong growth ahead for this stock, what impressed me the most was that UnitedHealth's core insurance business beat out drug benefits and data analytics division Optum in revenue growth. Optum rose an impressive 9% to $21.1 billion, while the insurance business posted an almost torrid 13% growth rate. Optum has been a major growth-driver for UnitedHealth for years, but the core insurance business's growth adds another layer of security to this stock, because it indicates that the company is firing on all cylinders.

What about the dividend? UnitedHealth's payout is a modest 1.73%. But dividend growth counts more than current yield for many investors, and the dividend has leapt 30% annually (on average) for the past five years and is easily supported by a payout ratio below 40%.

Meanwhile, worries keep piling up for other insurers

In addition to losses in their ACA segments, Anthem and Aetna face major merger issues. Last year, Anthem offered $54 billion to acquire Cigna (NYSE: CI) , while Aetna offered $38 billion to take over Humana. A brief euphoria drove shares of their acquisition targets to new heights, but those stocks dropped like stones when the Department of Justice filed suit to block the mergers. Currently, both Humana and Cigna trade well below their offer prices, meaning the market doesn't believe these deals will get done.

Interestingly, Aetna has been paying hardball, telling the DOJ it would probably be forced to withdraw from Obamacare altogether if the agency blocks its merger over antitrust concerns. We "believe it is very likely that we would need to leave the public exchange business entirely and plan for additional business efficiencies should our deal ultimately be blocked," CEO Mark Bertolini wrote in a July 5 letter.

Some have seen that as Aetna's payback to the Obama administration for blocking its merger. Aetna has now slashed its participation to just four states.

No crystal ball, but...

Lacking a crystal ball, there's no way to tell if Obamacare will be repealed, and many believe it won't be. That may be why the insurers have moved up almost in lockstep with the election -- it's hard for many to envision the U.S. without Obamacare, and the market is skeptical that the narrative has actually changed.

But that's ignoring the more immediate problem: the deteriorating risk pool and financial losses posed by the ACA. In addition, it's likely that fears about the ACA's survival will intensify as the Trump administration takes office, and if we start to see a slide, it could easily snowball.

Investors willing to ride out the volatility in the other insurers will probably be fine in the long term, but it I'd recommend that you at least temper your expectations. Meanwhile, UnitedHealth is the only insurer with the scale, the history, the diversification, and, most importantly, the lack of ACA sensitivity, to weather any storm that may come.

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Cheryl Swanson has no position in any stocks 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 .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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