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, while invested capital generally increased over the five-year span. The cost of capital remained relatively stable, with minor fluctuations. These factors combined to produce a shifting pattern in economic profit.

NOPAT Trend

Net operating profit after taxes exhibited an increase from US$3,029 million in 2019 to US$3,874 million in 2020. This was followed by a decrease to US$3,172 million in 2021, a further decline to US$3,053 million in 2022, and a final decrease to US$2,726 million in 2023. This indicates a weakening operational profitability towards the end of the period.

Cost of Capital

The cost of capital experienced a slight decrease from 9.96% in 2019 to 9.72% in 2020, then a more noticeable decrease to 9.10% in 2021. It subsequently rose to 9.69% in 2022 before settling at 9.31% in 2023. These fluctuations suggest changes in the perceived risk or market conditions affecting the company’s funding costs, but the changes were relatively contained.

Invested Capital

Invested capital showed a consistent upward trend, increasing 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. This suggests ongoing investment in the business, despite fluctuations in profitability.

Economic Profit

Economic profit mirrored the NOPAT trend, initially increasing from US$1,149 million in 2019 to US$1,749 million in 2020. It then experienced a substantial decline to US$384 million in 2021, followed by a further decrease to US$234 million in 2022. Notably, economic profit turned negative in 2023, reaching -US$89 million. This indicates that, in the final year, the company’s returns were insufficient to cover its cost of capital.

The shift from positive to negative economic profit in 2023 is a key observation. While invested capital remained high, the decline in NOPAT was sufficient to erode shareholder value, as measured by economic profit. The increasing invested capital, coupled with decreasing NOPAT, suggests a potential need to evaluate capital allocation efficiency and operational performance.

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 declining trend over the five-year period. Initially positive, it transitioned to a negative value in the most recent year. This shift warrants further investigation to understand the underlying drivers impacting value creation.

Economic Spread Ratio

The economic spread ratio began at 6.09% in 2019 and increased to a peak of 8.01% in 2020. This indicates improving profitability relative to invested capital during that period. However, a substantial decrease followed, with the ratio falling to 1.25% in 2021 and further to 0.80% in 2022. By 2023, the ratio had become negative, registering at -0.29%. This signifies that the return generated on invested capital was less than the cost of that capital.

Economic profit mirrored the initial positive trend of the economic spread ratio, increasing from US$1,149 million in 2019 to US$1,749 million in 2020. However, economic profit then experienced a significant decline, reaching US$384 million in 2021 and US$234 million in 2022. The negative economic spread ratio in 2023 corresponds with an economic loss of US$89 million, indicating value destruction.

Invested Capital

Invested capital increased from US$18,877 million in 2019 to US$21,850 million in 2020 and continued to rise to US$30,647 million in 2021. While it decreased slightly to US$29,089 million in 2022, it recovered to US$30,225 million in 2023. The consistent growth in invested capital, coupled with the declining economic spread ratio and eventual negative economic profit, suggests that increases in capital deployment are not translating into commensurate returns.

The observed trends suggest a weakening relationship between invested capital and the returns it generates. The shift from positive economic profit and a healthy economic spread to a negative economic spread and economic loss in 2023 is a critical development that requires detailed scrutiny to identify the root causes and implement corrective measures.

The economic profit margin exhibited a declining trend over the five-year period. While initially positive, the metric transitioned to a negative value in the most recent year. This shift warrants further investigation to understand the underlying drivers impacting profitability relative to the cost of capital.

Economic Profit Margin

The economic profit margin began at 1.79% in 2019 and increased to a peak of 2.30% in 2020. This initial increase coincided with a substantial rise in adjusted external revenues. However, subsequent years demonstrate a consistent decrease, falling to 0.46% in 2021, 0.25% in 2022, and ultimately reaching -0.08% in 2023. This indicates that the company’s profit generation, relative to its capital employed, has been diminishing.

Adjusted external revenues consistently increased throughout the period, moving from US$64,351 million in 2019 to US$105,285 million in 2023. Despite this revenue growth, the economic profit margin’s decline suggests that the increase in revenues was insufficient to offset rising costs or a higher cost of capital, or both.

Economic Profit

Economic profit followed a similar trajectory to the economic profit margin. It rose from US$1,149 million in 2019 to US$1,749 million in 2020, then decreased significantly to US$384 million in 2021 and US$234 million in 2022. The final year reported a loss of US$89 million, confirming the erosion of economic value creation. The negative economic profit in 2023 directly contributed to the negative economic profit margin.

The divergence between revenue growth and declining economic profit margin suggests a potential issue with operational efficiency, increasing capital costs, or a combination of factors. A detailed analysis of the components of economic profit – net operating profit after tax and the cost of capital – is recommended to pinpoint the specific areas requiring attention.