Stock Analysis on Net
Stock Analysis on Net

UnitedHealth Group Inc. (NYSE:UNH)

Present Value of Free Cash Flow to Equity (FCFE) 

Microsoft Excel

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company asset base.

Intrinsic Stock Value (Valuation Summary)

UnitedHealth Group Inc., free cash flow to equity (FCFE) forecast

US$ in millions, except per share data

Microsoft Excel
Year Value FCFEt or Terminal value (TVt) Calculation Present value at 9.78%
01 FCFE0 29,962
1 FCFE1 35,130 = 29,962 × (1 + 17.25%) 31,999
2 FCFE2 39,944 = 35,130 × (1 + 13.70%) 33,142
3 FCFE3 44,002 = 39,944 × (1 + 10.16%) 33,256
4 FCFE4 46,914 = 44,002 × (1 + 6.62%) 32,297
5 FCFE5 48,355 = 46,914 × (1 + 3.07%) 30,323
5 Terminal value (TV5) 742,812 = 48,355 × (1 + 3.07%) ÷ (9.78% – 3.07%) 465,805
Intrinsic value of UnitedHealth Group Inc. common stock 626,822
 
Intrinsic value of UnitedHealth Group Inc. common stock (per share) $681.12
Current share price $500.13

Based on: 10-K (reporting date: 2023-12-31).

1 See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

Required Rate of Return (r)

Microsoft Excel
Assumptions
Rate of return on LT Treasury Composite1 RF 4.79%
Expected rate of return on market portfolio2 E(RM) 13.79%
Systematic risk of UnitedHealth Group Inc. common stock βUNH 0.55
 
Required rate of return on UnitedHealth Group Inc. common stock3 rUNH 9.78%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

2 See details »

3 rUNH = RF + βUNH [E(RM) – RF]
= 4.79% + 0.55 [13.79% – 4.79%]
= 9.78%

FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

UnitedHealth Group Inc., PRAT model

Microsoft Excel
Average Dec 31, 2023 Dec 31, 2022 Dec 31, 2021 Dec 31, 2020 Dec 31, 2019
Selected Financial Data (US$ in millions)
Cash dividends paid on common shares 6,761 5,991 5,280 4,584 3,932
Net earnings attributable to UnitedHealth Group common shareholders 22,381 20,120 17,285 15,403 13,839
Revenues, customers 367,533 322,132 285,273 255,639 240,269
Total assets 273,720 245,705 212,206 197,289 173,889
Shareholders’ equity attributable to UnitedHealth Group 88,756 77,772 71,760 65,491 57,616
Financial Ratios
Retention rate1 0.70 0.70 0.69 0.70 0.72
Profit margin2 6.09% 6.25% 6.06% 6.03% 5.76%
Asset turnover3 1.34 1.31 1.34 1.30 1.38
Financial leverage4 3.08 3.16 2.96 3.01 3.02
Averages
Retention rate 0.70
Profit margin 6.04%
Asset turnover 1.34
Financial leverage 3.05
 
FCFE growth rate (g)5 17.25%

Based on: 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31).

2023 Calculations

1 Retention rate = (Net earnings attributable to UnitedHealth Group common shareholders – Cash dividends paid on common shares) ÷ Net earnings attributable to UnitedHealth Group common shareholders
= (22,381 – 6,761) ÷ 22,381
= 0.70

2 Profit margin = 100 × Net earnings attributable to UnitedHealth Group common shareholders ÷ Revenues, customers
= 100 × 22,381 ÷ 367,533
= 6.09%

3 Asset turnover = Revenues, customers ÷ Total assets
= 367,533 ÷ 273,720
= 1.34

4 Financial leverage = Total assets ÷ Shareholders’ equity attributable to UnitedHealth Group
= 273,720 ÷ 88,756
= 3.08

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.70 × 6.04% × 1.34 × 3.05
= 17.25%

FCFE growth rate (g) implied by single-stage model

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (460,262 × 9.78% – 29,962) ÷ (460,262 + 29,962)
= 3.07%

where:
Equity market value0 = current market value of UnitedHealth Group Inc. common stock (US$ in millions)
FCFE0 = the last year UnitedHealth Group Inc. free cash flow to equity (US$ in millions)
r = required rate of return on UnitedHealth Group Inc. common stock

FCFE growth rate (g) forecast

UnitedHealth Group Inc., H-model

Microsoft Excel
Year Value gt
1 g1 17.25%
2 g2 13.70%
3 g3 10.16%
4 g4 6.62%
5 and thereafter g5 3.07%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5 – g1) × (2 – 1) ÷ (5 – 1)
= 17.25% + (3.07% – 17.25%) × (2 – 1) ÷ (5 – 1)
= 13.70%

g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= 17.25% + (3.07% – 17.25%) × (3 – 1) ÷ (5 – 1)
= 10.16%

g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= 17.25% + (3.07% – 17.25%) × (4 – 1) ÷ (5 – 1)
= 6.62%