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Humana Inc (HUM): What’s Next After The Failed Merger?

Humana Inc (NYSE:HUM) has been in the news lately with its failed merger with Aetna Inc (NYSE:AET). When a merger between two companies fails, usually the stock prices of the companies drops as shareholders bid up the price hearing the news about a potential merger, anticipating the merger would go through.

But that didn’t happen with Humana. In fact, the opposite happened and shareholders have continued to buy more shares of this health insurer.

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Are you missing out? Should you look into Humana to see if it is a fit for your portfolio? Or are you better off waiting for the stock to cool off before adding a position?

Humana Background

Humana Inc (NYSE:HUM) didn’t start out as a health insurer. It started out as a nursing home company back in 1961. In the early 1970’s, the two founders, David Jones and Wendell Cherry sold the nursing home segment to focus on building hospitals.

By the 1980’s Humana was the largest hospital company in the world. In fact, the modern design of hospitals today where patient rooms are on the perimeter of the floor and nursing stations are centralized, was created by Humana.

As the 1980’s progressed and healthcare changed in the United States, the company created its own health insurance plan. As the health insurance business grew, they sold off their hospital stake in 1993 to focus solely on insurance.

Since that time, Humana has grown to become one of the top 5 largest health insurers in the United States.

The Economics of Humana

With Humana pulling out of the healthcare exchange and no longer offering insurance to individuals, the company is instead focusing on two areas. The first is employer plans. They will continue to offer insurance coverage to individuals through employer sponsored health plans. The second area of focus is on senior citizens and Medicare.

With the US population of baby boomers aging, this segment is a key growth area for Humana. And the company expects to grow handsomely as a result. For 2017, they have set their guidance for earnings per share to $10.80 to $11.00.

Beyond 2017, the company will complete its pullout of the Affordable Care Act (1) and will begin to focus on strategic investments throughout the healthcare space. With a current debt to capital ratio of just under 20%, they have room to take on more debt through acquisitions and not harm the growth of the company long term.

Humana has stated it is comfortable raising the debt to capital ratio to between 30-35% and going higher if the right acquisition presented itself.

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