Stock Analysis

Is Cigna Corporation's (NYSE:CI) Recent Performance Tethered To Its Attractive Financial Prospects?

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NYSE:CI
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Cigna's (NYSE:CI) stock up by 3.8% over the past three months. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. In this article, we decided to focus on Cigna's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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How To Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Cigna is:

12% = US$5.5b ÷ US$46b (Based on the trailing twelve months to June 2022).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.12 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Cigna's Earnings Growth And 12% ROE

At first glance, Cigna seems to have a decent ROE. Even so, when compared with the average industry ROE of 16%, we aren't very excited. Still, we can see that Cigna has seen a remarkable net income growth of 24% over the past five years. Therefore, there could be other causes behind this growth. Such as - high earnings retention or an efficient management in place. Bear in mind, the company does have a respectable ROE. It is just that the industry ROE is higher. So this also does lend some color to the high earnings growth seen by the company.

Next, on comparing with the industry net income growth, we found that Cigna's growth is quite high when compared to the industry average growth of 19% in the same period, which is great to see.

past-earnings-growth
NYSE:CI Past Earnings Growth September 28th 2022

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Cigna's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Cigna Making Efficient Use Of Its Profits?

Cigna's three-year median payout ratio to shareholders is 0.3%, which is quite low. This implies that the company is retaining 100% of its profits. So it looks like Cigna is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Cigna has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 17% over the next three years. However, Cigna's future ROE is expected to rise to 16% despite the expected increase in the company's payout ratio. We infer that there could be other factors that could be driving the anticipated growth in the company's ROE.

Conclusion

On the whole, we feel that Cigna's performance has been quite good. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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About NYSE:CI

Cigna

Cigna Corporation provides insurance and related products and services in the United States.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation5
Future Growth2
Past Performance2
Financial Health2
Dividends4

Read more about these checks in the individual report sections or in our analysis model.

Undervalued average dividend payer.