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 rose before stabilizing. The cost of capital remained relatively stable throughout the period, influencing the overall economic profit calculation.

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 more substantial decrease to US$2,726 million in 2023. This indicates a weakening operational profitability over the latter part of the analyzed timeframe.

Cost of Capital

The cost of capital experienced a slight decrease from 9.94% in 2019 to 9.71% in 2020, then a more noticeable decrease to 9.08% in 2021. It subsequently increased to 9.68% in 2022 and settled at 9.30% in 2023. These fluctuations, while not dramatic, would impact the economic profit calculation.

Invested Capital

Invested capital showed a consistent increase from US$18,877 million in 2019 to US$21,850 million in 2020, and a significant increase to US$30,647 million in 2021. It then decreased slightly to US$29,089 million in 2022 and stabilized at US$30,225 million in 2023. The substantial increase in invested capital in 2021 likely reflects strategic investments or acquisitions.

Economic Profit

Economic profit mirrored the NOPAT trend, initially increasing from US$1,152 million in 2019 to US$1,753 million in 2020. It then decreased significantly to US$388 million in 2021, further declining to US$239 million in 2022, and ultimately resulting in a negative economic profit of US$-84 million in 2023. The shift to negative economic profit in 2023 suggests that the returns generated from invested capital were insufficient to cover the cost of that capital.

The combined effect of declining NOPAT and a relatively stable cost of capital, coupled with increasing invested capital, resulted in a substantial erosion of economic profit over the period. The negative economic profit in 2023 warrants further investigation to determine the underlying causes and potential corrective actions.

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 is accompanied by fluctuations in both economic profit and invested capital, which collectively influence the ratio’s performance.

Economic Spread Ratio

The economic spread ratio began at 6.10% in 2019 and increased to a peak of 8.02% in 2020. This suggests an improving ability to generate returns exceeding the cost of capital during that period. However, a substantial decrease followed, with the ratio falling to 1.27% in 2021 and further to 0.82% in 2022. By 2023, the ratio had become negative, registering at -0.28%, indicating that returns generated were less than the cost of capital employed.

Economic Profit

Economic profit mirrored the initial positive trend of the economic spread ratio, increasing from US$1,152 million in 2019 to US$1,753 million in 2020. A significant decline then occurred, with economic profit decreasing to US$388 million in 2021 and US$239 million in 2022. The most recent year, 2023, saw economic profit turn negative, reaching US$ -84 million. This negative value directly contributed to the negative economic spread ratio observed in that year.

Invested Capital

Invested capital generally increased over the period, rising from US$18,877 million in 2019 to US$30,647 million in 2021. While it decreased slightly to US$29,089 million in 2022, it rebounded to US$30,225 million in 2023. The consistent growth in invested capital, coupled with the declining economic profit, likely exacerbated the downward trend in the economic spread ratio, as a larger capital base was required to generate diminishing returns.

The combined effect of decreasing economic profit and increasing invested capital resulted in a substantial deterioration of the economic spread ratio. The transition to a negative economic spread ratio in 2023 signals a potential concern regarding the efficiency of capital allocation and the company’s ability to generate value for its investors.

The economic profit margin exhibited a declining trend over the five-year period. While positive in the initial years, it transitioned to a negative value in the most recent year. This suggests a diminishing ability to generate returns exceeding the cost of capital.

Economic Profit

Economic profit increased from US$1,152 million in 2019 to US$1,753 million in 2020, representing a substantial improvement. However, subsequent years witnessed a significant decrease, falling to US$388 million in 2021, US$239 million in 2022, and ultimately reaching a loss of US$84 million in 2023. This indicates a weakening of the company’s ability to generate wealth for its investors.

Adjusted External Revenues

Adjusted external revenues demonstrated consistent growth throughout the period, increasing from US$64,351 million in 2019 to US$105,285 million in 2023. This positive revenue trajectory contrasts with the declining economic profit, suggesting that revenue growth alone is not translating into increased profitability after accounting for the cost of capital.

Economic Profit Margin

The economic profit margin began at 1.79% in 2019 and peaked at 2.30% in 2020, coinciding with the highest economic profit. A consistent decline followed, with the margin decreasing to 0.47% in 2021, 0.26% in 2022, and finally becoming negative at -0.08% in 2023. This negative margin signifies that the company’s return on capital employed is now less than its cost of capital.

The divergence between revenue growth and the declining economic profit margin warrants further investigation. Factors contributing to this trend could include increased operating costs, a higher cost of capital, or less efficient capital allocation. The shift to a negative economic profit margin in 2023 is a particularly concerning development, indicating a potential erosion of shareholder value.