Stock Analysis on Net
Stock Analysis on Net

UnitedHealth Group Inc. (NYSE:UNH)

Present Value of Free Cash Flow to the Firm (FCFF)

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 the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.

Intrinsic Stock Value (Valuation Summary)

UnitedHealth Group Inc., free cash flow to the firm (FCFF) forecast

US$ in millions, except per share data

Microsoft Excel
Year Value FCFFt or Terminal value (TVt) Calculation Present value at 9.06%
01 FCFF0 28,095
1 FCFF1 30,959 = 28,095 × (1 + 10.20%) 28,387
2 FCFF2 33,646 = 30,959 × (1 + 8.68%) 28,288
3 FCFF3 36,054 = 33,646 × (1 + 7.16%) 27,794
4 FCFF4 38,086 = 36,054 × (1 + 5.64%) 26,922
5 FCFF5 39,655 = 38,086 × (1 + 4.12%) 25,702
5 Terminal value (TV5) 835,503 = 39,655 × (1 + 4.12%) ÷ (9.06% – 4.12%) 541,527
Intrinsic value of UnitedHealth Group Inc. capital 678,620
Less: Commercial paper, long-term debt and other financing obligations (fair value) 60,939
Intrinsic value of UnitedHealth Group Inc. common stock 617,681
 
Intrinsic value of UnitedHealth Group Inc. common stock (per share) $671.18
Current share price $577.00

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

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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.

Weighted Average Cost of Capital (WACC)

UnitedHealth Group Inc., cost of capital

Microsoft Excel
Value1 Weight Required rate of return2 Calculation
Equity (fair value) 531,004 0.90 9.72%
Commercial paper, long-term debt and other financing obligations (fair value) 60,939 0.10 3.27% = 4.16% × (1 – 21.50%)

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

1 US$ in millions

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 920,284,334 × $577.00
= $531,004,060,718.00

   Commercial paper, long-term debt and other financing obligations (fair value). See details »

2 Required rate of return on equity is estimated by using CAPM. See details »

   Required rate of return on debt. See details »

   Required rate of return on debt is after tax.

   Estimated (average) effective income tax rate
= (20.50% + 21.70% + 20.50% + 24.00% + 20.80%) ÷ 5
= 21.50%

WACC = 9.06%

FCFF Growth Rate (g)

FCFF 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)
Interest expense 3,246 2,092 1,660 1,663 1,704
Net earnings attributable to UnitedHealth Group common shareholders 22,381 20,120 17,285 15,403 13,839
 
Effective income tax rate (EITR)1 20.50% 21.70% 20.50% 24.00% 20.80%
 
Interest expense, after tax2 2,581 1,638 1,320 1,264 1,350
Add: Cash dividends paid on common shares 6,761 5,991 5,280 4,584 3,932
Interest expense (after tax) and dividends 9,342 7,629 6,600 5,848 5,282
 
EBIT(1 – EITR)3 24,962 21,758 18,605 16,667 15,189
 
Short-term borrowings and current maturities of long-term debt 4,274 3,110 3,620 4,819 3,870
Long-term debt, less current maturities 58,263 54,513 42,383 38,648 36,808
Shareholders’ equity attributable to UnitedHealth Group 88,756 77,772 71,760 65,491 57,616
Total capital 151,293 135,395 117,763 108,958 98,294
Financial Ratios
Retention rate (RR)4 0.63 0.65 0.65 0.65 0.65
Return on invested capital (ROIC)5 16.50% 16.07% 15.80% 15.30% 15.45%
Averages
RR 0.64
ROIC 15.82%
 
FCFF growth rate (g)6 10.20%

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).

1 See details »

2023 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 3,246 × (1 – 20.50%)
= 2,581

3 EBIT(1 – EITR) = Net earnings attributable to UnitedHealth Group common shareholders + Interest expense, after tax
= 22,381 + 2,581
= 24,962

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [24,962 – 9,342] ÷ 24,962
= 0.63

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 24,962 ÷ 151,293
= 16.50%

6 g = RR × ROIC
= 0.64 × 15.82%
= 10.20%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (591,943 × 9.06% – 28,095) ÷ (591,943 + 28,095)
= 4.12%

where:

Total capital, fair value0 = current fair value of UnitedHealth Group Inc. debt and equity (US$ in millions)
FCFF0 = the last year UnitedHealth Group Inc. free cash flow to the firm (US$ in millions)
WACC = weighted average cost of UnitedHealth Group Inc. capital

FCFF growth rate (g) forecast

UnitedHealth Group Inc., H-model

Microsoft Excel
Year Value gt
1 g1 10.20%
2 g2 8.68%
3 g3 7.16%
4 g4 5.64%
5 and thereafter g5 4.12%

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)
= 10.20% + (4.12% – 10.20%) × (2 – 1) ÷ (5 – 1)
= 8.68%

g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= 10.20% + (4.12% – 10.20%) × (3 – 1) ÷ (5 – 1)
= 7.16%

g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= 10.20% + (4.12% – 10.20%) × (4 – 1) ÷ (5 – 1)
= 5.64%