Ci. Stock – Asset-light, cash-rich companies can make excellent portfolio diversifiers, especially for their income and total return potential. The market seems to be chasing high-growth names, with several insurers now back with some territory.
That brings me to Cigna (NYSE: CI ), which I last covered here in July of last year. The stock has had a good run at $340 before returning to the $265 I recommended it at last year. In this article, I will provide an update and discuss why the stock is currently a bargain for total return investors.
Cigna is an S&P 500 ( SPY ) company and one of the largest global health insurance companies in the market. Currently, it has over 165 million customer relationships and operates in 30+ countries worldwide. Over the past 12 months, CI generated $183 billion in total revenue. As shown below, its revenue has grown over the past 10 years, including in the last few years following the Express Scripts acquisition.
Lettering The Greatest Wealth Is Health In Grunge Style Green Ci Stock Illustration
CI is benefiting from a strong labor market, and this is reflected in total revenue growing 6% annually in the first quarter. This was driven in part by strong 8% revenue growth at Evernorth Health Services, the CI pharmacy benefit manager formerly Express Scripts.
A key driver of PBM growth is the rise of biosimilars on the market, such as the previous number one drug, Humira, from AbbVie ( ABBV ). Biosimilars come at a lower cost than the original drug, and are therefore cheaper to source for PBMs like Evernorth.
Also encouragingly, CI medical membership grew strongly by 10% YoY and the medical expense ratio also improved, i.e. medical payments as a percentage of collected premiums declined.
Looking ahead, CI has many avenues for growth as its Medicare Advantage business outpaces market growth. Given the rapidly growing 65+ cohort, the fastest growing age group in the U.S., CI could see meaningful growth in this business segment even as the market rate increases.
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Also, growth in specialty drugs like weight-loss drug Ozempic from Eli Lilly ( LLY ) and the potential for the worldwide Alzheimer’s disease market to reach $14 billion bode well for EverNorth and beyond, as Specialty drugs make up 40 percent. The income of this unit. . Management also noted that Evernorth Care represents one of its most significant long-term growth opportunities, driven by growing demand for virtual and behavioral health services.
Meanwhile, management has a fairly clear strategy for capital allocation in the medium term. This includes maintaining a debt-to-equity ratio of 40%, which supports its strong A credit rating.
Management also expects to spend 20% of its operating cash flow to finance growth, and the remaining 80% should be used on dividends, debt repayments, and stock buybacks and strategic M&A. As shown below, CI has repurchased a staggering 18% of its outstanding float in the past 3 years alone, since its acquisition of Express Scripts.
While CI currently only yields 1.9%, the dividend is very well covered with a 20% payout ratio. Management has also demonstrated its willingness to increase the dividend meaningfully in recent years, and this was reflected in the 10% dividend increase earlier this year.
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In conclusion, I see CI as a good value stock at the current price of $265.88 with a forward PE of just 10.7. This means that management will generate a 9.3% return for every dollar spent on stock purchases. As shown below, CI’s current valuation is also comfortably below its normalized PE of 12.3.
This price seems very affordable for a company that can reasonably grow its annual profit by ~10% in the medium term for the reasons mentioned. This is lower than the 9% to 14% range that analysts expect in the 2024 to 2026 timeframe. Given CI’s relatively low valuation relative to historical norms and its forward prospects, the stock could potentially deliver double-digit annual total returns over the next few years, and analysts have priced The average target is $329.
Cigna appears to be a great long-term total return choice in today’s market, especially for its relatively low valuation compared to historical norms. Not only does Cigna generate solid earnings growth potential from both the PBM and insurance segments, it also has a strong capital allocation policy that includes both business investments, dividends and share buybacks at current discount levels. But are very doable. As such, investors looking for value and growth should give CI a hard look at the current price.
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I am a US-based financial writer with an MBA in Finance. I have over 15 years of investment experience, and generally focus on stocks that are more defensive in nature with a medium to long-term horizon. My aim is to share useful and insightful knowledge and analysis with readers. Contributing writer for Hoya Capital Income Builder.
Analyst Disclosure: I/We do not hold any stock, option or similar positions in any of the companies mentioned, and have no plans to initiate such positions within the next 72 hours. This article is written by myself, and it expresses my own opinion. I don’t get paid for this (except Seeking Alpha). I have no business relationship with any of the companies whose stock is mentioned in this article.
I am not an investment advisor. This article is for informational purposes and does not constitute financial advice. Readers are encouraged and expected to exercise due diligence and draw their own conclusions before making investment decisions.
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If you have an ad blocker enabled, you may be prevented from continuing. Please close your ad blocker and refresh. Shares of Cigna Corp. ( CI ) fell more than 10% after the company announced a $67 billion deal to acquire Express Scripts Holdings Co. ( ESRX ), including $15 billion in debt, while Express Scripts shares It rose more than 8.5 percent on the day. The merger consideration consists of $48.75 in cash and 0.2434 shares of Cigna stock per ExpressScript share, but is subject to regulatory approvals before the deal closes.
The merger is widely seen as a response to similar mergers in the healthcare sector as well as Amazon.com, Inc. JPMorgan Chase & Co. (JPM). In this agreement, Walgreens Boots Alliance, Inc. ( WBA ), UnitedHealth Group Incorporated ( UNH ) and Humana Inc may also include additional M&A in the healthcare space. (HUM) among other things. (See also: Buffett, Bezos, Dimon to own healthcare company.)
From a technical perspective, Cigna stock broke through key trendline support, the 200-day moving average and both pivot point support levels not seen below since June of last year. The Relative Strength Index (RSI) fell to an oversold level of 21.66, but the Moving Average Convergence Divergence (MACD) turned bearish. With the news out of the way, shares are likely to stabilize near the $170.00 support level.
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To learn about the application of support and resistance levels in chart analysis, see Chapter 3 of the Technical Analysis Course at the Academy
Traders should look for consolidation around $170.00 before the stock potentially bounces back above the S2 support at $175.06. If the stock breaks through $170.00, it could drop to the next trendline support level at around $165.00. If the stock is higher, traders should look for S1 support near $185.47 or the 200-day moving average of $188.80 in the coming weeks.
Chart courtesy of StockCharts.com. The author has no positions in the stock(s) mentioned except passively managed index funds.
The offers that appear in this table are from partnerships that receive compensation. This compensation may affect how and where listings appear. It does not include all the offers available in the market. Shares of health plans fell sharply on Thursday after pharmacy benefits and health insurance provider Cigna Corp. ( CI ) doubled the estimated impact of COVID-19 on its full-year results.
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