There's no better time to watch a stock than during earnings season. Last week, UnitedHealth Group (UNH 0.25%) reported its financial results for the third quarter of this year.
The $400 billion (by market capitalization) health insurer beat both analysts' revenue and earnings estimates. This raises the following question: Is UnitedHealth Group a suitable post-earnings buy for investors seeking a fast-growing dividend? Let's take a look at the company's fundamentals and valuation to answer this question.
UnitedHealth Group's fundamentals remain healthy
UnitedHealth Group generated $72.3 billion in revenue in the third quarter, which was 11.1% higher than the year-ago period and exceeded analyst estimates by 1.5%. This revenue increase was the result of growth in both of UnitedHealth Group's segments, which include Optum and UnitedHealthcare. For those unfamiliar, Optum is the information and technology service provider that helps to modernize healthcare and improve the overall health of UnitedHealth Group's customers. UnitedHealthcare provides health benefits to employers, individuals, and Medicare beneficiaries.
UnitedHealth Group's overall operating margin increased by 80 basis points year over year to 7.9% in the third quarter. On the Q3 2021 earnings call, CFO John Rex noted that direct COVID-19 care and testing ran above expectations. But Rex added that this was more than offset by delayed elective procedures as hospitals once again shifted their attention to treating COVID-19 patients as the delta variant surged in the summer.
UnitedHealth Group's higher revenue and margins led to a 28.8% year-over-year increase in adjusted (non-GAAP) earnings per share (EPS) to $4.52 in the recent quarter. This adjusted EPS figure also managed to beat analyst expectations of $4.41 by 2.5%.
The strong third-quarter is also what led the company to raise its adjusted EPS guidance for this year -- from its prior range of $18.30 to $18.80 reaching the updated range of $18.65 to $18.90. Compared to the $16.88 in adjusted EPS that was produced in 2020, the new guidance would represent a robust 10.5% to 12% year-over-year growth rate in adjusted EPS.
Strong future dividend growth is supported
UnitedHealth Group is doing well from a fundamental standpoint. But how safe is its dividend and can it satisfy investors looking for high dividend growth? Based on its most recent guidance and dividends that will be paid this year, UnitedHealth Group's dividend payout ratio will be in the high-20% to low-30% range. Its current payout ratio strikes a good balance between rewarding shareholders with a safe, market-beating 1.4% yield, and investing back into the business to drive future growth.
The reasonable payout ratio and growing demand for health insurance are two key reasons the company should continue to grow at a high rate. Analysts are forecasting that EPS will grow at 14% annually over the next five years. This is what leads me to believe UnitedHealth Group's dividend should continue to grow in the low-to-mid teens each year for the foreseeable future.
A rock-solid balance sheet
UnitedHealth Group's dividend is also backed by a sturdy balance sheet. In support of this point, let's take a look at its interest coverage ratio, which is a way for investors to determine how many times over a company can pay its interest expenses with its earnings before interest and taxes (EBIT).
UnitedHealth Group's interest coverage ratio through the first three quarters of this year was 15 ($18.43 billion in EBIT/$1.23 billion in interest expenses), which was the same as the year-ago period ($18.89 billion in EBIT/$1.26 billion in interest expenses). Simply put, this largely insulates the company from the risk of going bankrupt anytime soon or having to cut its dividend to keep up with its debt.
The price is right for long-term investors
At $437 a share, UnitedHealth Group is slightly below its all-time high of nearly $439 a share. While the case can oftentimes be made that a stock is overvalued when it is approaching its all-time high, I don't believe that argument is valid with this company.
That's because UnitedHealth Group is trading at a forward price-to-earnings ratio of 20.8, which is just below the S&P 500's forward P/E ratio of 21.3. In other words, UnitedHealth Group is arguably one of the highest-quality S&P 500 components and its valuation is cheaper than the S&P 500 as a whole. Its annual earnings growth potential in the teens also works out to a price-to-earnings-growth or PEG ratio of approximately 1.5, which is still reasonable for an outstanding business like UnitedHealth Group.