Teva Pharmaceutical vs. UnitedHealth: Which Stock's Dividend Dominates?

Dividend stocks outperform non-dividend-paying stocks over the long run. It happens in good markets and bad, and the benefit of dividends can be quite striking -- dividend payments have made up about 40% of the market's average annual return from 1936 to the present day.

But few of us can invest in every single dividend-paying stock on the market, and even if we could, we're likely to find better gains by being selective. Today, two health care companies -- one that makes the drugs you need, and one that helps you afford them -- will square off in a head-to-head battle to determine which offers a better dividend for your portfolio.

Tale of the tape
Established in 1901, Teva Pharmaceutical (TEVA -3.04%) is the world's largest generic drug manufacturer, and also ranks in the top 10 of global pharmaceutical companies by revenue. Headquartered in Israel, the company has operations in more than 60 countries around the world, with production facilities in Israel, North America, South America and Europe. Teva's global product portfolio comprises more than 1,000 molecules and more than 400 generic equivalents of prescription drugs in various therapeutic categories. Teva has recently diversified from its longtime status as a generic drug maker to become an integrated pharmaceutical giant through some notable acquisitions, including Barr Pharmaceuticals in 2008, Ratiopharm in 2010 and Cephalon in 2011.

Founded in 1977, UnitedHealth Group (UNH 2.96%) is the most diversified managed health care company in the United States, and also ranks among the Top 20 companies on the latest Fortune 500 list. Headquartered in Minnesota, the company operates through two business units, UnitedHealthcare and Optum, which serve more than 85 million individuals. UnitedHealth has aggressively expanded through acquisitions over the past decade -- Oxford Health Plans, PacifiCare Health Systems and Sierra Health Services -- and it now operates in all 50 states in the U.S. and 20 other countries worldwide. Because of its leadership in the health-insurance industry, UnitedHealth became only the second insurer (and first health insurer) ever added to the Dow Jones Industrial Average in 2012.

Source: Morningstar and YCharts.
*Free cash flow margin is free cash flow divided by revenue for the trailing 12 months.

Round one: endurance (dividend-paying streak)
According to Dividata, Teva began paying quarterly dividends in 1990, and it has been paying ever since. However, Teva's 24-year long dividend-paying streak merely matches that of UnitedHealth, which began paying annual dividends in 1990 and continued the practice for nearly two decades before switching to quarterly payments in 2010. This round produces a rare tie between our two competitors.

Tie.

Round two: stability (dividend-raising streak)
Teva has been increasing its shareholder distributions at least once every year since 2003 for a decade-long dividend-raising streak. UnitedHealth, on the other hand, held its dividend payouts steady for several years before quarterly payouts began in 2010. According to Dividata, UnitedHealth's dividend-raising streak only began that year. The drugmaker wins this round easily.

Winner: Teva, 1-0.

Round three: power (dividend yield)
Some dividends are enticing, but others are merely tokens that barely affect an investor's decision. Have our two companies sustained strong yields over time? Let's take a look:

TEVA Dividend Yield (TTM) data by YCharts

Winner: Teva, 2-0.

Round four: strength (recent dividend growth)
A stock's yield can stay high without much effort if its share price doesn't budge, so let's look at the growth in payouts over the past five years.

TEVA Dividend data by YCharts

Winner: UnitedHealth, 1-2.

Round five: flexibility (free cash flow payout ratio)
A company that pays out too much of its free cash flow in dividends could be at risk of a cutback, particularly if business weakens. We want to see sustainable payouts, so lower is better:

TEVA Cash Dividend Payout Ratio (TTM) data by YCharts

Winner: UnitedHealth, 2-2.

Bonus round: opportunities and threats
Teva and UnitedHealth have tied in the best-of-five battle, but investors should never base their decisions on past performance alone. Tomorrow might bring a far different business environment, so it's important to also examine each company's potential, whether it happens to be nearly boundless or constrained too tightly for growth. Let's dig into each company's opportunities to find out which stock truly offers better opportunities for dividend investors today.

Teva opportunities

• Teva will launch a generic version of Pfizer's blockbuster Viagra in 2017.
• Teva recently won FDA approval f to sell generic equivalents of Eli Lilly's Cymbalta.
• Teva expects outstanding results from the Phase III trial of its branded prostate cancer treatment Custirsen.
• Teva's generic versions of statins Lescol and Zocor should capture more global market share.
• Teva plans to streamline its pipeline and develop 10 mto 15 new therapeutic treatments by 2015.

UnitedHealth opportunities

• UnitedHealth is adding millions of new subscribers from the military's TRICARE network.
• It has access to high-growth unregulated health insurance markets under the Optum banner.
• UnitedHealth should benefit from a growing middle class population in the Brazilian market.

Teva threats

• Teva will lose exclusivity on its multiple sclerosis drug Copaxone in the first half of 2014.
• Mylan will launch a generic version of Copaxone once exclusivity expires.

UnitedHealth threats

• UnitedHealth has limited its participation in Obamacare exchanges because of higher costs.
• UnitedHealth has been forced to rewrite and price catastrophic policies for 6 million individuals.
• Aflac could capture share from UnitedHealth and other health insurers.

One dividend to rule them all
In this writer's humble opinion, it seems that Teva has a slightly better shot at long-term outperformance, thanks to its strong pipeline of both patented and generic drugs, as well as new business partnerships. UnitedHealth has access to some lucrative insurance markets, but Obamacare could weaken its core insurance business, particularly if regulations tighten further after the program's 2014 rollout truly tests the system's stability. You might disagree, and if so, you're encouraged to share your viewpoint in the comments below. No dividend is completely perfect, but some are bound to produce better results than others. Keep your eyes open -- you never know where you might find the next great dividend stock!