Humana Inc. (NYSE:HUM)

The period under review demonstrates fluctuating financial performance as measured by economic profit. Net operating profit after taxes (NOPAT) initially increased, then declined over the five-year span. Simultaneously, invested capital generally increased, though with some variation, while the cost of capital remained relatively stable. These factors combined to produce a decreasing trend in economic profit.

NOPAT Trend

Net operating profit after taxes rose from US$3,029 million in 2019 to US$3,874 million in 2020, representing a substantial increase. However, NOPAT subsequently decreased to US$3,172 million in 2021, followed by a further decline to US$3,053 million in 2022, and continued to fall to US$2,726 million in 2023. This indicates a weakening operational profitability over the latter part of the period.

Cost of Capital

The cost of capital experienced minor fluctuations throughout the period, beginning at 8.97% in 2019. It decreased to 8.21% in 2021, before increasing to 8.74% in 2022 and settling at 8.43% in 2023. These changes were relatively small and do not appear to be a primary driver of the observed trends in economic profit.

Invested Capital

Invested capital showed an overall increasing trend, rising from US$18,877 million in 2019 to US$21,850 million in 2020. A significant increase was observed in 2021, reaching US$30,647 million. While it decreased slightly to US$29,089 million in 2022, it rebounded to US$30,225 million in 2023. The growth in invested capital, coupled with declining NOPAT, contributed to the reduction in economic profit.

Economic Profit

Economic profit peaked at US$1,958 million in 2020, coinciding with the highest NOPAT and a relatively low cost of capital. However, it experienced a consistent decline in subsequent years, falling to US$655 million in 2021, US$511 million in 2022, and ultimately reaching US$177 million in 2023. This downward trend suggests that the company’s returns are increasingly failing to cover the cost of its invested capital.

In summary, while invested capital generally increased, the decline in NOPAT significantly impacted economic profit, resulting in a substantial decrease over the analyzed period. The relatively stable cost of capital did not offset the combined effect of these other factors.

The financial data for the periods ending December 31, 2019, through December 31, 2023, indicate discernible trends in both net income attributable and net operating profit after taxes (NOPAT).

Net Income Attributable to the Company (in US$ millions)

The net income increased from 2707 million in 2019 to a peak of 3367 million in 2020, indicating a significant growth during this period. Following this peak, there was a noticeable decline over the subsequent years, with the value reducing to 2933 million in 2021, then to 2806 million in 2022, and further down to 2489 million by the end of 2023. This pattern suggests a contraction in profitability after the strong performance in 2020.

Net Operating Profit After Taxes (NOPAT) (in US$ millions)

NOPAT exhibited a similar trend to net income. It rose from 3029 million in 2019 to 3874 million in 2020, representing substantial growth and operational efficiency that year. However, post-2020, NOPAT consistently declined, falling to 3172 million in 2021, then to 3053 million in 2022, and finally to 2726 million in 2023. This decline suggests a decrease in operating profitability and efficiency over these years.

Overall, both net income and NOPAT demonstrated a peak in 2020, followed by a downward trend through 2023. This pattern may reflect external market challenges, operational issues, or changes in the business environment that impacted profitability and operating performance after 2020.

The financial data presented provides insights into the company's provision for income taxes and cash operating taxes over a five-year period from 2019 to 2023.

Provision for Income Taxes

This item experienced significant fluctuations during the period. Starting at 763 million US dollars in 2019, the provision increased sharply to 1,307 million in 2020. This was followed by a considerable decrease to 485 million in 2021. In the subsequent years, the provision rose again to 762 million in 2022 and continued increasing slightly to 836 million in 2023. Overall, the provision demonstrates volatility, with a peak in 2020 and a relative stabilization in the last two reported years, albeit at levels higher than in 2019 and 2021.

Cash Operating Taxes

The trend for cash operating taxes similarly shows variability but with a generally upward movement over the period. Beginning at 656 million US dollars in 2019, cash operating taxes surged to 1,175 million in 2020. In 2021, there was a marked decline to 543 million, mirroring the fall seen in the provision for income taxes. However, the taxes paid increased substantially again in 2022 to 950 million and further to 1,108 million in 2023, reaching the highest point in the dataset. This suggests an increase in cash outflows related to tax operations in recent years compared to the earlier periods.

In summary, both provision for income taxes and cash operating taxes demonstrate irregular patterns with notable peaks in 2020, sharp declines in 2021, and subsequent increases through 2022 and 2023. This pattern may reflect changes in profitability, tax strategies, or regulatory impacts affecting the company's tax liabilities and payments across these years.

Total Reported Debt & Leases

The total reported debt and leases increased significantly from 2019 through 2021, rising from 6,339 million USD in 2019 to a peak of 13,551 million USD in 2021. This represents more than a doubling within two years. However, from 2021 to 2022, there was a notable reduction to 12,032 million USD, followed by a slight increase again to 12,602 million USD in 2023. This suggests a phase of aggressive leverage build-up followed by some deleveraging or stabilization in recent years.

Stockholders’ Equity

Stockholders’ equity exhibited steady growth over the five-year period, increasing from 12,037 million USD in 2019 to 16,262 million USD in 2023. While there was a minor dip in 2022 to 15,311 million USD from the prior year’s high of 16,080 million USD, the overall trend shows continuous capital accumulation and potentially retained earnings growth contributing to the equity base.

Invested Capital

Invested capital followed a trend similar to that of total debt and leases, with a sharp increase from 18,877 million USD in 2019 to 30,647 million USD in 2021. After peaking in 2021, invested capital declined moderately to 29,089 million USD in 2022 and then edged up slightly to 30,225 million USD in 2023. This pattern indicates a significant expansion in total capital invested until 2021 with a partial contraction and then stabilization thereafter.

Summary of Trends

Across the analyzed periods, there is a clear expansion in total invested capital driven primarily by rising debt and leases structures until 2021. The subsequent years showed attempts to moderate leverage levels while maintaining growth in stockholders’ equity. The growth in equity suggests an increasing net worth of the company, providing a balancing counterweight to increased liabilities. The fluctuations in invested capital align closely with the changes in debt, indicating the company was likely pursuing growth strategies requiring substantial external financing up to 2021, and has since moved towards stabilizing its capital base.

The economic spread ratio demonstrates a consistent decline over the five-year period. While economic profit fluctuated, the invested capital generally increased, contributing to the observed trend in the economic spread ratio.

Economic Spread Ratio

The economic spread ratio decreased from 7.07% in 2019 to 0.58% in 2023. This indicates a diminishing ability to generate returns exceeding the cost of capital. The most significant decline occurred between 2021 and 2023, with a drop from 2.14% to 0.58%. The ratio peaked in 2020 at 8.96%, suggesting a particularly strong performance year relative to invested capital.

Economic profit exhibited volatility. It increased from US$1,335 million in 2019 to US$1,958 million in 2020, then decreased substantially to US$655 million in 2021. Further declines were observed in 2022 (US$511 million) and 2023 (US$177 million). This decreasing economic profit, coupled with a relatively stable invested capital base, directly contributed to the declining economic spread ratio.

Invested Capital

Invested capital increased from US$18,877 million in 2019 to US$30,647 million in 2021. While it decreased slightly in 2022 to US$29,089 million, it recovered to US$30,225 million in 2023. The growth in invested capital, without a corresponding increase in economic profit, explains a portion of the reduction in the economic spread ratio. The relatively consistent invested capital from 2021-2023, alongside decreasing economic profit, amplified the downward trend in the ratio.

The combination of decreasing economic profit and a generally increasing invested capital base resulted in a substantial reduction in the economic spread ratio over the analyzed period. This suggests a weakening of the company’s ability to generate value from its investments.

The economic profit margin demonstrates a consistent decline over the five-year period. While economic profit initially increased, the rate of revenue growth outpaced profit growth, resulting in diminishing margins.

Economic Profit Margin Trend

In 2019, the economic profit margin stood at 2.08%. This figure increased to 2.57% in 2020, representing the highest margin observed during the analyzed timeframe. However, subsequent years witnessed a steady decrease. The margin fell to 0.79% in 2021, further declining to 0.55% in 2022, and reaching a low of 0.17% in 2023.

The relationship between adjusted external revenues and economic profit reveals a changing dynamic. Revenues exhibited consistent growth throughout the period, increasing from US$64,351 million in 2019 to US$105,285 million in 2023. However, economic profit peaked in 2020 at US$1,958 million and then experienced a substantial reduction, ending at US$177 million in 2023. This divergence suggests increasing costs or decreasing returns on revenue generation.

Revenue Growth vs. Profit Growth

Adjusted external revenues increased by approximately 63.2% between 2019 and 2023. In contrast, economic profit decreased by approximately 86.7% over the same period. This disparity indicates that revenue growth did not translate into proportional profit growth, suggesting potential inefficiencies or increased competitive pressures.

The declining economic profit margin, coupled with increasing revenues but decreasing economic profit, warrants further investigation into the underlying cost structure and operational efficiency. The trend suggests a weakening ability to generate economic value from revenue.