Cigna Stock: Many Reasons to Invest (NYSE:CI)


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One of the insurance companies in my stock portfolio is Cigna (NYSE:CI). Companies with growing (and predictable) sales and profits like Cigna fit well into my portfolio. Premiums paid to insurers are used to purchase bonds, which could increase the float. A a good example whose wagon has gotten pretty big is Warren Buffett\’s Berkshire Hathaway (BRK.A)(BRK.B).

Cigna is a major US health insurer that has been in business for many years. In addition to insurance, Cigna offers healthcare services such as pharmaceutical benefits, pharmacy home delivery and employee assistance programs, data analytics, and the like to healthcare plans, employers, government organizations, and healthcare professionals.

There are many reasons why an investment in Cigna is attractive. Cigna\’s growing customer base, for example, as well as rising interest rates and the stock\’s attractive valuation make it worth a buy.

Cigna he is also in very good financial shape. Health insurers talk about medical cost ratios to express the profitability of the insurance business. This report calculates the sum of all your medical expenses and divides it by your premiums. Cigna\’s medical cost ratio is less than 1, which means their insurance business is profitable on its own and they have costs under control. Cigna is a strong buy in my opinion, as there are many reasons to like the company.

Expected 10%-13% growth in compound EPS


Pathways to growth (Cigna 1Q23 Investor Presentation)

One reason to invest in Cigna is strong earnings growth in recent years. Cigna\’s diluted earnings per share have increased 13.1% annually over the past 4 years, and the growth didn\’t stop there. Many analysts expect the growth trajectory to continue into 2023 and beyond. Cigna forecasts a strong 2023 with diluted earnings per share of at least $24.70, representing a 6.2% year-over-year increase.

Cigna posted strong earnings in the first quarter of 2023 on revenue of $46.46 billion and diluted earnings per share of $5.41, which was about 3% higher than analyst estimates.

The Cigna Group consists of Evernorth Health Services and Cigna Healthcare. Evernorth provides health services to health plans, employers, government organizations and health care professionals. Specialty Pharmacy, Evernorth Care and Evernorth\’s Health Benefits Program (Insignia) are growing strongly in terms of revenue and customer growth. The increased convenience has contributed to the growth of customers. Specialty Pharmacy accounts for approximately 40% of Evernorth\’s total revenue. Cigna has its costs under control. The medical assistance report represents medical expenses as a percentage of premiums. Cigna\’s medical care ratio was 81.3%, which is great. For the full year 2023, Cigna expects its medical care ratio to be between 81.5% and 82.3%.

For 2023, it expects accelerated growth in its Medicare Advantage business due to high-quality, affordable health care plans and geographic expansion. Cigna also sees strong growth in its individual and family plans. Cigna therefore believes that it will achieve compound earnings growth of approximately 10-13% over the next few years over the long term.


Expected cash flow generation and capital distribution framework (Cigna 1Q23 Investor Presentation)

Another reason to invest in Cigna is its shareholder-friendly policies. Approximately 20% of cash from operations is spent on dividends and approximately 70% on share buybacks or strategic mergers and acquisitions, which can further increase long-term shareholder value.

The stable profit stream is beneficial to shareholders because it allows for a steadily growing dividend. The dividend is expected to increase 5.4% this year and 5.9% in 2024. Currently, the dividend yield is 2%, which is lower than the 3.8% yield on 10-year government bonds. However, dividends are expected to increase each year, while Treasury income will remain flat for the next few years. Therefore, income investors should consider Cigna as a good long-term investment.

On average, Cigna distributes approximately 68% of its free cash flow to shareholders by distributing dividends and repurchasing shares. The remaining money is used to repay the debt to reach a debt-to-capitalization ratio of 40%. Its shareholder return policy is therefore sustainable in the long term. Due to the low share price, the repurchase yield is quite high. Investors clearly don\’t have much faith in the company\’s future. If Cigna decides to buy back shares on the open market, the high buyback yield can be beneficial because it can drive up the stock price.


Highlights of Cigna\’s cash flow (Annual reports and analyst calculations)

The third reason: economic evaluation

The third reason to invest in Cigna is the stock\’s inexpensive valuation. The PE ratio is a valuation metric commonly used to understand current and future valuations. I used YCharts to plot historical PE ratio from 2000 to present. With a PE ratio of 11.1, we see the stock as favorably valued compared to its historical valuations. The current market value represents an approximately 14% discount to the 3-year median.

YCharts data

About 23 analysts revised their earnings estimates upward, forecasting earnings per share of $28.35 for 2024 (+14.2%). The projected PE ratio for 2024 is only 8.6, which is a large underestimation compared to historical data. Growth should continue, as Cigna targets 10% to 13% EPS growth annually. Investors buying the stock at this price level can expect share price gains over the next few years due to undervaluation and EPS growth. Including dividends, I expect Cigna to offer investors a mid-teens annual return over the next few years.


Insurance companies like Cigna invest their premiums to grow their float. The free float increases through investment income, but the fair value of the investment portfolio has decreased due to the sharp rise in interest rates. Several banks, such as SVB Financial, have had to sell part of their investment portfolio at a reduced value. They had to sell some assets due to the large outflow of deposits. Cigna, like other insurance companies, does not run this risk.

Rising interest rates mean more revenue for Cigna. However, net investment income for the first quarter of 2023 was significantly lower than it was a year ago ($277 million versus $414 million last year). This was due to lower returns on their partnership investments and the unfavorable impact of the Chubb transaction. We will see further interest rate hikes this year, followed by a decline in 2024.

Another risk can be found in their private equity and real estate funds. These are classified under \”Other long-term investments\” which are valued at $3.9 billion (total long-term investments are $19 billion). Collectively, they include investments in securities limited partnerships and real estate limited partnerships, direct investments in real estate joint ventures, and other custodial businesses necessary to support various insurance and health care businesses.

Cigna expects continued volatility in the performance of private equity and real estate funds as fair market valuations are adjusted to reflect market and portfolio transactions. However, this risk isn\’t particularly significant—less than 5% ($195 million) of its other long-term investments are exposed to office real estate.


I like investing in insurance companies like Cigna because its revenues and profits are predictable and grow steadily over time. Cigna is an American health insurer that also offers health services through its acquisition of Evernorth. There are many reasons I like investing in Cigna. Cigna is growing rapidly and earnings per share have increased 13% annually over the past 4 years. In 2023, Cigna expects earnings per share to increase 6.2% year over year. The long-term outlook is also positive: Cigna targets annual EPS growth of between 10% and 13%.

Approximately 20% of cash flow from operations is spent on dividends and approximately 70% on share repurchases and strategic mergers and acquisitions, further increasing shareholder value. The dividend yield is currently 2% and is expected to increase 5.4% this year. Approximately 68% of free cash flow is used to distribute dividends and buy back shares. Its shareholder return policy is sustainable in the long term. I like it when Cigna buys back shares because it increases dividends per share and earnings per share. Furthermore, its equity valuation is favorable suggesting a 14% undervaluation. Since Cigna expects to grow between 10% and 13% annually, investors can expect annual returns in the mid-teens. We see many reasons to invest in Cigna.

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