Dividend investors love it when a payout increase tops our expectations. But it's always important to make sure that the company in question can afford the hike.

One example of a stock whose most recent dividend hike was surprisingly high is health insurer UnitedHealth Group (UNH -1.20%), whose management recently opted to increase its quarterly dividend from $1.25 per share to $1.45. That's a significant increase (16%), and it could mean that the company is in great shape and management is excited to return ever more cash to shareholders. On the other hand, it could also be an unsustainable amount, particularly if the business is faltering. Does UnitedHealth Group's dividend remain safe?

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A moat to be reckoned with

As a testament to its impressive economic moat, the company processed nearly a trillion dollars of gross billed charges during 2020 through its two business platforms -- Optum, an information and technology service provider, and UnitedHealthcare, its namesake health benefit provider. 

That's a very impressive top line. To examine the financials further, let's talk about earnings per share (EPS), which comes in two forms -- GAAP (which stands for "generally accepted accounting principles") and non-GAAP.

The primary advantage of using GAAP EPS is that it allows for greater consistency from companies in reporting financial results. However, non-GAAP EPS takes into consideration one-time or unusual items, such as restructuring costs and costs related to acquisitions, allowing more relevant details for investors to consider.

In looking at UnitedHealth Group, non-GAAP EPS appears to be the better metric. That's because the company typically incurs significant amortization of its intangible assets. Amortization is an accounting method that can be used to lower the book value of an intangible asset -- for example, goodwill, patents, and copyrights.

In UnitedHealth Group's case, it consistently makes acquisitions that often come with goodwill that is later written down. In the first quarter of 2021 alone, $223 million net of taxes, or $0.23/share, was amortized. This can significantly skew GAAP EPS, given that intangible asset amortization is an instrumental part of UnitedHealth's business.

UnitedHealth Group generated $16.88 in adjusted diluted EPS in 2020, and it paid out $4.66 per share in dividends. That's a payout ratio of 27.6% -- more than sustainable at UnitedHealth's current revenue levels.

For context, UnitedHealth Group's non-GAAP EPS payout ratio in 2020 was slightly above CVS Health's 26.7% and well above Anthem's 16.9% during that time. Management is guiding for a midpoint of $18.35 in EPS for 2021, and the dividend hike means it'll be paying out $5.40 per share in dividends. That's still a very respectable 29.4%.

Cash keeps flowing

Things look good from a free cash flow (FCF) standpoint, too. UnitedHealth brought in $22.2 billion in operating cash flow in 2020, with capital expenditures of $2 billion -- that's $20 billion-plus in FCF. The dollar amount of dividends paid in 2020 was $4.6 billion, making the FCF payout ratio a reasonable 22.8%.

Management hasn't provided 2021 guidance regarding operating cash flow, but some back-of-the-envelope math can help here. If we annualize UnitedHealth's $5.4 billion in FCF during first-quarter 2021, we get $21.7 billion in FCF for the year. The dividend hike of 15.9% will require a payout of $5.3 billion. Thus, UnitedHealth Group's FCF payout ratio is set to expand a bit to a still manageable 24.4%.

From both an EPS and a FCF standpoint, UnitedHealth Group's dividend payout ratios look very similar from 2020 to 2021 -- a good sign that the dividend increase is affordable.

A healthy balance sheet

Of course, we can't know for sure without looking at the company's balance sheet. There, one particularly helpful metric is the interest coverage ratio, which is a measure of how many times a company can cover its interest expense with earnings before income taxes (EBIT).

UnitedHealth Group's interest coverage ratio improved from a satisfactory 10.4 in Q1 2020 ($4.6 billion in EBIT/$437 million in interest expense) to an even better 16.0 in Q1 2021 ($6.3 billion/$397 million).

It can also be very useful to weigh a company's cash and cash equivalents against its long-term debt to get a sense of the business's total net debt.

UnitedHealth Group boasted $22.9 billion in cash and cash equivalents at the end of Q1 2021 against $37.4 billion in long-term debt (excluding current maturities of long-term debt or long-term debt maturities in the next 12 months) during that time, which is a $14.5 billion net debt load -- reasonable for a company of UnitedHealth Group's size and scale.

Should you buy it now?

Despite a dividend hike that exceeded my expectations, UnitedHealth Group's payout ratios are positioned to remain virtually unchanged from 2020 to 2021. Its interest coverage ratio has improved tremendously over the past year, and the company enjoys firmly investment-grade credit ratings from the major ratings agencies. All in all, I believe that the dividend remains about as safe now as it was leading up to the dividend increase.

UnitedHealth Group's recent dividend increase is further evidence that investors who are looking for a combination of stability and future growth would be wise to consider beginning -- or adding to -- an investment in the company, especially since there has been a pullback in UnitedHealth Group's stock price since the dividend increase.