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 increased over the five-year span. The cost of capital remained relatively stable, influencing the overall economic profit calculation.

NOPAT Trend

Net operating profit after taxes exhibited an initial increase from US$3,029 million in 2019 to US$3,874 million in 2020. Subsequently, NOPAT decreased to US$3,172 million in 2021, followed by a further decline to US$3,053 million in 2022, and ultimately reaching US$2,726 million in 2023. This represents a net decrease in NOPAT over the five-year period.

Cost of Capital

The cost of capital experienced a slight decrease from 9.93% in 2019 to 9.07% in 2021. It then increased to 9.66% in 2022 before decreasing again to 9.28% in 2023. These fluctuations, while present, were relatively contained, suggesting a consistent overall capital cost structure.

Invested Capital

Invested capital showed a consistent upward trend, increasing from US$18,877 million in 2019 to US$21,850 million in 2020, and significantly to US$30,647 million in 2021. While decreasing slightly to US$29,089 million in 2022, it rebounded to US$30,225 million in 2023. This indicates a growing capital base throughout the period.

Economic Profit

Economic profit mirrored the NOPAT trend, initially increasing from US$1,155 million in 2019 to US$1,756 million in 2020. It then decreased substantially to US$392 million in 2021 and further to US$242 million in 2023. Notably, economic profit turned negative in 2023, reaching -US$81 million. This signifies that, in 2023, the return generated from invested capital was less than the cost of that capital.

The decline in economic profit, culminating in a negative value in 2023, warrants further investigation. While invested capital increased, the corresponding growth in NOPAT was insufficient to offset the cost of capital, resulting in value destruction during that year. The earlier increases in economic profit suggest successful capital allocation in 2019 and 2020, but the subsequent declines indicate a weakening of this performance.

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 correlated with changes in economic profit and invested capital.

Economic Spread Ratio

The economic spread ratio began at 6.12% in 2019 and increased to a peak of 8.03% 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 1.28% in 2021 and further to 0.83% in 2022. By 2023, the ratio had become negative, registering at -0.27%, indicating that returns generated were less than the cost of capital.

Economic profit exhibited a similar pattern of initial growth followed by decline. While economic profit increased from US$1,155 million in 2019 to US$1,756 million in 2020, it subsequently decreased to US$392 million in 2021 and US$242 million in 2022. The final year saw a loss, with economic profit reaching -US$81 million.

Invested Capital

Invested capital increased consistently 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 recovered to US$30,225 million in 2023. The continued growth in invested capital, coupled with the declining economic profit, likely contributed to the decreasing economic spread ratio.

The combination of decreasing economic profit and relatively stable, and even increasing, invested capital resulted in the observed decline in the economic spread ratio. The negative economic spread ratio in 2023 signals a potential need to evaluate capital allocation strategies and operational efficiency.

The economic profit margin exhibited a declining trend over the five-year period. While initially positive, the metric transitioned to a negative value in the most recent year. This shift warrants further investigation to understand the underlying drivers impacting profitability relative to the cost of capital.

Economic Profit

Economic profit increased from US$1,155 million in 2019 to US$1,756 million in 2020, representing a substantial improvement. However, subsequent years witnessed a significant decrease, falling to US$392 million in 2021 and further to US$242 million in 2022. By 2023, economic profit had become negative, reaching US$-81 million.

Adjusted External Revenues

Adjusted external revenues demonstrated consistent growth throughout the period. Revenues increased from US$64,351 million in 2019 to US$105,285 million in 2023. This indicates a strong expansion in sales, despite the declining economic profit.

Economic Profit Margin

The economic profit margin peaked at 2.31% in 2020, coinciding with the highest economic profit value. A consistent decline followed, with the margin decreasing to 0.47% in 2021 and 0.26% in 2022. In 2023, the margin turned negative, reaching -0.08%. This suggests that while revenue increased, the cost of generating that revenue, relative to the capital employed, rose at a faster rate, ultimately eroding profitability.

The divergence between revenue growth and the declining economic profit margin suggests potential issues with cost management, capital efficiency, or an increasing cost of capital. The negative economic profit margin in 2023 is a key indicator that the company is not generating returns exceeding its cost of capital, and requires attention.