Because investing is future-oriented, it is important that investors purchase businesses with ample growth potential in the years ahead. The best way to do this is to only consider investing in leaders within thriving industries.
Boasting a $62 billion market capitalization, Humana (HUM -1.77%) is the fifth-biggest player in the healthcare plans industry. But is the stock a buy for investors in search of dividend growth? Let's peek at Humana's fundamentals and valuation and see if an answer presents itself.
Humana has strong top-line growth
Originally founded as a nursing home operator in 1961, Humana began the process of establishing itself as a health insurance plan juggernaut in the 1980s. Since that time, the company has grown its total medical, vision, and dental membership base to over 22 million as of June 30. This is especially encouraging because of the robust future that awaits the global health insurance industry due to chronic diseases becoming more common. That's why the market research firm Fortune Business Insights is forecasting that the global health insurance market will rise from $2.1 trillion in 2021 to over $3 trillion by 2028.
| Metric | Q2 2022 | Q2 2023 |
|---|---|---|
| Total plan membership | 22.3 million | 22.2 million |
| Diluted share count | 127.1 million | 125.1 million |
Data source: Humana.
Humana's total consolidated revenue in Q2 grew 13% year over year to $26.7 billion. The company overcame stagnant overall plan membership in Q2 with the help of a 12.9% year-over-year jump in its highly profitable Medicare Advantage health plans (now totaling 5.8 million). This more favorable business mix coupled with increased premiums is what led Humana's total revenue to surge for the quarter.
The company's non-GAAP (adjusted) diluted earnings per share (EPS) edged 2.1% higher over the year-ago period to $8.94 in Q2. More elective surgeries exiting the COVID-19 pandemic caused operating-expenses growth to outpace total consolidated revenue growth during the quarter. This is why Humana's adjusted diluted EPS lagged top-line growth for the quarter.
Fortunately, the company's double-digit Medicare Advantage growth looks poised to persist. Combining this outsized growth with its ability to complete complementary acquisitions and implement premium hikes, the future is promising for Humana: Analysts think that the company's adjusted diluted EPS will grow by 13.6% annually through the next five years -- a better growth rate than the healthcare plans industry average of 11.8%.
Image source: Getty Images.
Humana's high-dividend growth can continue
By virtue of the S&P 500 index's 1.5% dividend yield, Humana's 0.7% yield isn't going to be favorably viewed by most income investors. But for those investors with enough patience, the company could be a greatly rewarding dividend-growth investment.
This is because Humana's dividend payout ratio is set to register at around 12% in 2023. That allows the company to retain the capital necessary to support future growth, debt repayment, and share buybacks. This is why Humana should be able to grow its dividend at a faster pace than earnings for the foreseeable future.
Humana has an appealing valuation for a top-notch company
The challenge of a greater number of medical claims throughout the industry spooked investors, and shares of Humana have shed 3% of their value so far in 2023. Alongside growing profits, the stock's forward price-to-earnings (P/E) ratio contracted to 15.6. While this is above the healthcare plans industry average forward P/E ratio of 14.1, Humana's outstanding growth potential more than makes up for the valuation premium. That is what warrants a buy rating for dividend-growth investors at the current $497 share price, in my opinion.
