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The Cigna Group(CI-N)

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Should Value Investors Buy This Healthcare Stock?

Motley Fool - Fri Aug 11, 7:50AM CDT

Value investing is a rather popular investing strategy. Seeing as almost everyone enjoys buying great products at discounted prices, it isn't surprising that we would also like to get good deals on stocks.

But investors need to be careful that they aren't buying junk companies for their portfolios. Health insurer Cigna(NYSE: CI), is far from junk: Having turned a $5,000 investment made 10 years ago into nearly $20,000 with dividends reinvested today, the proof is in the pudding. Put into perspective, that is much better than the $16,000 that the same investment amount in the S&P 500 index would now be worth with dividends reinvested.

But are shares of Cigna currently a buy for value investors? Let's assess the company's fundamentals and valuation.

Growth potential remains decent

Through its Evernorth pharmacy benefit services and care services business and Cigna healthcare business, Cigna has built customer relationships with over 165 million customers. This huge customer base has earned the company an $86 billion market capitalization, which makes it the fourth largest player in its industry.

Cigna posted $48.6 billion in total revenue during the second quarter, which was up 6.8% over the year-ago period. The company's overall customer relationships declined by 6.9% since Dec. 31, 2022, to 165.7 million to conclude Q2 2023.

At first glance, this would seem concerning. But this was only due to a decision from New York Life to not renew a supplemental behavioral coverage contract with Cigna. Excluding this event from its results, the health insurer's total customer relationships have grown by 5% since the end of last year. Because Cigna cites the supplemental behavioral coverage contract as an insignificant portion of its revenue, other customer relationship growth and increased prices led the top line higher.

MetricQ2 2022Q2 2023
Net margin4.3%3.7%
Diluted share count (in millions)318.3296.9

Data source: Cigna.

Cigna's non-GAAP (adjusted) diluted earnings per share (EPS) decreased by 1.1% year over year to $6.13 for Q2. As more medical members are having elective procedures performed that were delayed in the COVID-19 pandemic shutdowns, the company processed more claims. This is what led Cigna's non-GAAP (generally accepted accounting principles) net margin to contract by 60 basis points in the quarter. Diminished profitability was only partly countered by the company's share repurchase program, which lowered its shares outstanding to a sizable degree. These factors are how Cigna's adjusted diluted EPS growth trailed behind total revenue growth during the quarter.

As its claims return to pre-pandemic levels and customer relationships grow, analysts are predicting that Cigna's adjusted diluted EPS will compound 11.1% annually over the next five years. This is close to the industry peer average of 11.7%.

A doctor consults with their patient.

Image source: Getty Images.

A dividend with the capability for future growth

Cigna offers investors a 1.7% dividend yield, which is marginally above the 1.5% yield of the S&P 500 index. And the growth potential of the payout isn't lacking, either.

This is because Cigna's dividend payout ratio is set to come in at around 20% in 2023. Since that leaves the company with capital for acquisitions, debt repayment, and share repurchases, it should have the ability to continue handing out double-digit percentage annual dividend hikes for the foreseeable future.

The stock is convincingly cheap

Elevated claims costs have held the healthcare insurance plan industry back as a whole in 2023. And Cigna has been no exception, with shares down 13% so far for the year. Because of this underperformance, the already discounted stock has become even more compelling: Cigna's forward price-to-earnings (P/E) ratio of 10.4 is well below the industry average forward P/E ratio of 13.9. This undervaluation seems to support the idea that the stock is a buy for value investors.

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Kody Kester has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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