3 Reasons Warren Buffett Might Buy UnitedHealth Group Stock

The stock of UnitedHealth Group (UNH -1.09%) is trading around its five-year lows. It plummeted after posting poor earnings numbers earlier this year amid rising costs. It has also withdrawn its guidance, changed its CEO, and the Department of Justice is reportedly looking into its billing practices.

There has been a flurry of negative news around the business in recent months, which has made investors bearish on this once seemingly safe health insurance company.

Warren Buffett, CEO of Berkshire Hathaway, likes to invest in stocks when they are struggling. As long as their financials are in good shape and the future of the business is still encouraging, an underperforming stock can be a good addition to Berkshire’s portfolio.

Here are three reasons I believe Buffett may want to buy the stock right now.

Warren Buffett likes insurance companies

Buffett likes to stay within his circle of competence when investing so he’s focusing on businesses he understands well. And one thing he understands well is insurance. Berkshire Hathaway owns GEICO, one of the best known insurance companies in the country.

There can be a bit more complexity when it comes to health insurance, but it could still be an enticing option for Buffett to consider, especially given that UnitedHealth is one of the largest health insurers in the country. Its role in the healthcare industry is huge, and its strong position gives it a competitive moat. The overall long-term safety and stability that comes with insurance companies could make UnitedHealth an attractive addition to the Berkshire portfolio.

UnitedHealth’s financials are still solid

Buffett likes to invest in businesses that have strong numbers, and that’s a nonnegotiable consideration. Not only do the financials need to look good, but there also needs to be a lot of predictability in a company’s growth. The insurer has been facing adversity in recent years due to rising costs, but it has continually generated strong margins.

Over the trailing 12 months, the healthcare company reported profits totaling $22 billion on revenue of $410 billion, for a profit margin of more than 5%. Single-digit margins have been typical for UnitedHealth, but as the company grows its business and insures more people, its bottom line is likely to increase. Even with the challenges ahead, the company believes it can continue to have long-term growth ranging from 13% to 16% per year.

UnitedHealth pays a high dividend

The dividend yield is 2.9% today, which is higher than average because of the stock’s decline this year — it had fallen 40% as of June 20. Its yield is now more than double the 1.3% that you can get with the average S&P 500 stock.

And it is also a dividend growth stock. Its current quarterly payout is $2.21 a share, which is 77% higher than the $1.25 it was paying five years ago. That averages out to a compound annual growth rate of more than 12%.

While Berkshire may not like to pay dividends, it invests in many companies that do.

Should you invest in UnitedHealth Group?

UnitedHealth is a stock I could see Buffett buying today, due to its beaten-down valuation and attractive fundamentals. Although the short term may look concerning, this is an investment that can make a lot of sense over the long term.

And even if Buffett doesn’t end up buying the stock, you may still want to consider adding it to your portfolio. At just 13 times its trailing earnings, you can get it at a fairly attractive price. While it may still be a challenging road ahead, UnitedHealth Group’s strong financials and position atop the healthcare industry should enable it to do well and continue to grow over the long haul.