Humana Inc.’s (HUM) Medicare Advantage Plans are sustainable because they provide cost savings as compared to government-provided Medicare plans, according to Willem Schilpzand, a money manager for Alpine Capital Research.
“Humana’s Medicare Advantage plans are relatively more attractive to potential new Medicare members than original Medicare plans, Medicare has secular demographic tailwinds, Humana is under leveraged, and finally HUM’s capital allocation policies should reward investors while we wait for the Medicare Advantage headwinds to pass,” Schilpzand said.
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The number of people enrolling in Medicare Advantage Plans is growing. Schilpzand said approximately 29% of Medicare eligible individuals currently choose a Medicare Advantage. That figure is compared to only 18% of Medicare eligible six years ago, and Schilpzand said he expects that trend to continue.
“Regarding the secular tailwind, each year 2%-3% more individuals turn 65 years of age and therefore age into Medicare,” Schilpzand said. “The demographic situation of the U.S. assures that this growth will continue well into the future.”
As that trend plays out, Schilpzand said Humana is poised to benefit.
“Humana has an internal debt to capital goal and currently has the capability to issue approximately 10% of their market cap in debt to reach that internal target,” Schilpzand said.
As a result, Humana is likely to use that for what Schilpzand called “investor friendly purposes” – increased dividends, share repurchases or M&A activity. “Humana is investor friendly and they have appropriately returned their excess free cash flow to investors in the form of dividends and share repurchases,” Schilpzand said. “Humana’s business model is not very capital intensive, so we anticipate this to continue. We believe this return to shareholders can approximate mid-single digit levels annually of Humana’s market cap.”
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