Over the past decade, Cigna Corporation (CI, Financial) has delivered capital gains averaging 14.56% per year. Yes, the upward path has sometimes been bumpy, but the trajectory kept taking it higher.
It also pays a modest dividend now, having recently boosted its quarterly payment from a meagre $0.01 per quarter to $1.00. At the current share price of $292.23, that works out to a yield of 1.46%.
If the company can maintain its historical capital gains trajectory with the new and improved dividend added to the mix, shareholders could potentially see an annual yield of 16%, not even including share repurchases. However, can the company really be relied on for future growth?
About Cigna
Cigna is a company in transition. In September 2020, it launched Evernorth, a pharmacy benefits management company. That came roughly two years after it merged with Express Scripts. In October 2021, it sold its life, accident and supplemental benefits businesses to Chubb INA Holdings Inc. Now, it operates as a PBM and health insurance services company:
Source: Cigna presentation from Aug. 4, 2022
Cigna’s biggest PBM client is the U.S. Department of Defense. It also serves third-party health insurance plans and employers. On the health insurance side, it mainly serves employers who have self-funding plans. It had 17.8 million total medical customers at the end of the second quarter of 2022.
Competition
GuruFocus compares Cigna with Humana Corp. (HUM, Financial), Elvance Health Inc. (ELV, Financial), Centene Corp. (CNC, Financial), CVS Health Corp. (CVS, Financial), Molina Healthcare Inc. (MOH, Financial) and others.
As this chart shows, Cigna has been outperformed by both Elvance and Humana:
Still, it has posted strong annualized returns over all time periods in the past decade:
- Year-to-date: 26.56%
- One year: 37.80%
- Three years: 21.68%
- Five years: 10.07%
- 10 years: 20.63%
Financial strength
Judging by its financial strength table, Cigna carries quite a bit of debt. But that appears to be part of its business model:
Source: Cigna presentation from Aug. 4, 2022
According to the second-quarter 2022 earnings report, the debt-to-capitalization ratio was 42.1% as of June 30, 2022. Its target is 40%, so it's not far off its goal.
Note that there is no result for the Altman Z-Score for Cigna because the Altman Z-Score does not apply to insurance companies. Since this score is one of the components making up the financial strength ranking, then we might assume its absence has had a negative effect on the overall ranking.
The Piotroski F-Score is solid, indicating the company is managing its finances well.
With a weighted average cost of capital (WACC) of 5.85% and a return on invested capital (ROIC) of 5.3%, the company seems to be neither creating nor destroying value.
Profitability
None of the metrics on the company's profitability table, except for the years of profitability, are much better than those posted by rest of the health care plans industry. It's about average for everything and doing worse compared to its own history. Nevertheless, it has been profitable for each of the last 10 years.
Growth
The full-marks ranking for Cigna's growth is encouraging. This 10-year chart shows how revenue, Ebitda and earnings per share without non-recurring items have grown:
Free cash flow growth also has been respectable, most of the time:
- Three years: -15.40%
- Five years: 23.06%
- 10 years: 32.34%
Dividends and share repurchases
Last year, Cigna became a dividend player, increasing its quarterly dividend from $0.01 to $1.00 per share. That will make the company more attractive to shareholders and help push up the share price.
The current dividend yield of 1.46% is right on the median of health care plan companies with meaningful dividend payments. It appears the company is allocating 20% of cash flow from operations to dividends.
Looking at the dividends table, we can ignore that enormous dividend growth rate, as it is skewed by the 1,000% growth in 2021, which is a one-time event. Any future raises will be much more modest.
Outlook
For full-year 2022, the company estimates:
- Adjusted revenues of at least $178 billion.
- Adjusted EPS of at least $22.90.
The investor presentation also tells us the company plans to allocate 10% of its cash flow to debt repayment and 70% to share buybacks and strategic mergers and acquisitions. Hopefully, more will go towards repurchases after the massive new issuance of shares in 2019:
Valuation
Cigna's valuation looks about average. Beginning in May 2021, shareholders began to lose confidence in Cigna. That sentiment turned around in late November 2021, and long-term shareholders are back on track:
According to the GF Value chart, the stock is fairly valued.
With a price-earnings ratio of 17.43, Cigna is slightly less expensive than the industry median of 19.76. The PEG ratio at 0.80 indicates the stock is slightly undervalued when its Ebitda growth rate is considered.
These are the other valuations provided by the GuruFocus system:
Cigna receives a high rating for its GF Score, with a top rank in growth, decent profitability and mediocre financial strength, momentum and GF Value.
Gurus
Gurus appear to like Cigna, with 19 of them including it in their portfolios at the end of the second quarter. The three largest holdings were those of:
- Dodge & Cox, which held 16,654,297 shares at the close of trading on June 30. That represented 5.46% of the company’s shares and 3.05% of the fund’s assets under management. The fund cut its stake by 4.09% during the quarter.
- Chris Davis (Trades, Portfolio) of Davis Selected Advisers; he reduced his holding by 6.66% and finished the quarter with 3,138,133 shares.
- Larry Robbins (Trades, Portfolio) of Glenview Capital Management, who added 30.09% to bring his position up to 2,076,189 shares.
Institutional investors also have a notable stake in Cigna. They owned 73.72% of the company’s shares on June 30.
Insiders owned 1.23%, with Chairman and CEO David Cordani leading the pack. He held 168,368 shares as of May 18.
Conclusion
Cigna nowadays is a different company than it was just five years ago, after transitioning to focus exclusively on health care insurance. However, it remains a growing and profitable company, with strong fundamentals and a fairly valued or potentially undervalued stock price.
