{"id":54544,"date":"2023-08-29T18:57:18","date_gmt":"2023-08-29T22:57:18","guid":{"rendered":"https:\/\/ifintechworld.com\/markets\/a-quality-executive-compensation-plan-lowers-the-risk-of-investing-in-humana\/"},"modified":"2023-08-29T18:57:20","modified_gmt":"2023-08-29T22:57:20","slug":"a-quality-executive-compensation-plan-lowers-the-risk-of-investing-in-humana","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=54544","title":{"rendered":"A Quality Executive Compensation Plan Lowers The Risk Of Investing In Humana"},"content":{"rendered":"
\n

Recap from July Picks<\/strong><\/h3>\n

The Exec Comp Aligned with ROIC Model Portfolio (+4.4%) outperformed the S&P 500 (-0.3%) from July 14, 2023 through August 14, 2023. The best performing stock in the portfolio was up 25%. Overall, 9 out of the 15 Exec Comp Aligned with ROIC Stocks outperformed the S&P from July 14, 2023 through August 14, 2023.<\/p>\n

This Model Portfolio only includes stocks that earn an attractive or very attractive rating and align executive compensation with improving ROIC. I think this combination provides a uniquely well-screened list of long ideas because return on invested capital (ROIC) is the primary driver of shareholder value creation.<\/p>\n

New Stock Feature for August: Humana Inc.
\n
\n HUM
\n <\/fbs-ticker> <\/strong><\/h3>\n

Humana (HUM) is the featured stock in August\u2019s Exec Comp Aligned with ROIC Model Portfolio.<\/p>\n

Humana has grown revenue and net operating profit after tax (NOPAT) by 9% and 10% compounded annually, respectively, since 2012. The company\u2019s NOPAT margin improved from 3% in 2016 to 4% in the trailing twelve months (TTM), while invested capital turns rose from 2.9 to 3.1 over the same time. Rising NOPAT margins and invested capital turns drive the company\u2019s return on invested capital (ROIC) from 7% in 2016 to 11% in the TTM.<\/p>\n

<\/fbs-ad><\/p>\n

Figure 1: Humana\u2019s Revenue & NOPAT: 2012 \u2013 TTM<\/strong><\/p>\n

Executive Compensation Properly Aligns Incentives<\/strong><\/h3>\n

Humana\u2019s executive compensation plan aligns the interests of executives and shareholders by tying its performance-based awards to three-year aggregated adjusted ROIC. According to Humana\u2019s proxy statement, the company ties at least 55% of long-term incentives to adjusted ROIC.<\/p>\n

The company\u2019s inclusion of adjusted ROIC, a variation of ROIC, as a performance goal has helped create shareholder value by driving higher ROIC and economic earnings. When I calculate ROIC using superior fundamental data, I find that Humana\u2019s ROIC has increased from 7% in 2016 to 11% in the TTM. Economic earnings rose from $705 million to $1.8 billion over the same time.<\/p>\n

Figure 2: Humana\u2019s ROIC: 2016 \u2013 TTM<\/strong><\/p>\n

HUM Has Further Upside<\/strong><\/h3>\n

At the current price of $489\/share, HUM has a price-to-economic book value (PEBV) ratio of 1.2. Though the company\u2019s PEBV ratio is higher than other featured stocks, the stock still holds quality upside.<\/p>\n

If I assume Humana\u2019s NOPAT margin remains at 4% (equal to TTM margin) and the company grows revenue by 6% compounded annually (vs. consensus estimates of 10% in 2023 and 8% in 2024) over the next decade, the stock would be worth $612\/share today \u2013 a 25% upside. See the math behind this reverse DCF scenario. In this scenario, Humana\u2019s NOPAT grows 6% compounded annually through 2032.<\/p>\n

For reference, Humana has grown NOPAT by 6% compounded annually since 2016. Should the company grow NOPAT more in line with historical growth rates, the stock has even more upside.<\/p>\n

Critical Details Found in Financial Filings by My Firm\u2019s Robo-Analyst Technology<\/strong><\/p>\n

Below are specifics on the adjustments I made based on Robo-Analyst findings in Humana\u2019s 10-Qs and 10-K:<\/p>\n

Income Statement: I made $982 million in adjustments with a net effect of removing $246 million in non-operating expenses (<1% of revenue).<\/p>\n

Balance Sheet: I made $6.8 billion in adjustments to calculate invested capital with a net increase of $6.8 billion. One of the largest adjustments was $1.4 billion (5% of reported net assets) in asset write-downs.<\/p>\n

Valuation: I made $12.7 billion in adjustments, with a net effect of decreasing shareholder value by $12.7 billion. The largest adjustment to shareholder value was $12.6 billion in total debt, which includes $451 million in operating leases. This total debt adjustment represents 21% of Humana\u2019s market value.<\/p>\n

Disclosure: David Trainer, Kyle Guske II, Hakan Salt, and Italo Mendon\u00e7a receive no compensation to write about any specific stock, style, or theme.<\/em><\/p>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Recap from July Picks The Exec Comp Aligned with ROIC Model Portfolio (+4.4%) outperformed the S&P 500 (-0.3%) from July 14, 2023 through August 14, 2023. The best performing stock in the portfolio was up 25%. Overall, 9 out of the 15 Exec Comp Aligned with ROIC Stocks outperformed the S&P from July 14, 2023 […]<\/p>\n","protected":false},"author":1,"featured_media":25589,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[241],"tags":[83],"class_list":["post-54544","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-markets","tag-featured"],"yoast_head":"\nA Quality Executive Compensation Plan Lowers The Risk Of Investing In Humana | iFintechWorld<\/title>\n<meta name=\"description\" content=\"Recap from July Picks The Exec Comp Aligned with ROIC Model Portfolio (+4.4%) outperformed the S&P 500 (-0.3%) from July 14, 2023 through August 14,\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/ifintechworld.com\/?p=54544\" \/>\n<meta property=\"og:locale\" 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