Is Cigna Corporation's (NYSE:CI) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?
Cigna (NYSE:CI) has had a great run on the share market with its stock up by a significant 25% over the last month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Cigna’s ROE in this article.
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.
See our latest analysis for Cigna
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Cigna is:
11% = US$5.3b ÷ US$48b (Based on the trailing twelve months to September 2020).
The ‘return’ is the income the business earned over the last year. That means that for every $1 worth of shareholders’ equity, the company generated $0.11 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. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.
A Side By Side comparison of Cigna’s Earnings Growth And 11% ROE
At first glance, Cigna seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 14%. This certainly adds some context to Cigna’s exceptional 23% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company’s earnings growth. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.
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 8.4% in the same period, which is great to see.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. What is CI worth today? The intrinsic value infographic in our free research report helps visualize whether CI is currently mispriced by the market.
Is Cigna Efficiently Re-investing Its Profits?
Cigna’s three-year median payout ratio to shareholders is 0.4%, 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.
Moreover, Cigna is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to drop to 0.2% over the next three years. The fact that the company’s ROE is expected to rise to 15% over the same period is explained by the drop in the payout ratio.
Conclusion
On the whole, we feel that Cigna’s performance has been quite good. In particular, it’s great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. 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. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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