High-quality dividend stocks tend to hold up the best in turbulent markets. This was recently demonstrated by the health insurer Humana (HUM -0.05%). Its stock has fallen 1% year to date. This is significantly better than the 7% drop in the S&P 500 index thus far.
But is Humana currently a buy for value investors? Let's dive into the stock's fundamentals and valuation to get an answer.
Strong revenue and earnings growth
The company recorded $83.1 billion in revenue during the year, which equates to a 7.7% year-over-year (YOY) growth rate. How is a large-cap stock like Humana still managing to produce high-single-digit sales growth?
The first catalyst that led the company's revenue higher was an increase in medical membership. Thanks to steadily growing demand for its health insurance products, Humana's medical membership edged 1.4% higher in 2021 to 17.1 million.
The other element that helped the company's revenue to surge higher was medical care inflation. Because the cost of healthcare consistently goes up each year, the health insurance premiums that Humana charges its customers do as well.
The company reported $20.64 in adjusted diluted EPS in 2021, which works out to a 10.1% growth rate over the year-ago period. Aside from the higher revenue base, Humana also repurchased shares in 2021. This caused the stock's outstanding share count to fall 2.7% YOY to 129.4 million in 2021.
And Humana looks positioned to keep growing its adjusted diluted EPS at a double-digit rate for the foreseeable future. Rising healthcare costs and an increase in chronic medical conditions will lead to further medical membership growth in the years to come.
As the fifth-largest health insurer in the world with a $57 billion market capitalization, few stocks will benefit from secular tailwinds in the industry as much as Humana. This is why analysts are predicting the stock will be able to deliver 14.6% annual earnings growth through the next five years.
Rapid dividend growth can continue
Humana's 0.7% dividend yield is only about half of the S&P 500's 1.4% yield. But the company will have little difficulty growing its business in the future. This is because of the favorable growth dynamics of the health insurance industry.
What's more, Humana's dividend payout ratio will be just under 13% in 2022. This should allow the company to retain the capital it needs to repay debt, expand its business, and execute share buybacks to drive adjusted diluted EPS higher.
As a result, I believe the stock can at least double its payout to shareholders in the next five years.
A wonderful stock at a fair valuation
Humana is a solid, dividend growth stock. And the valuation appears to seal the deal to make it a great buy-and-hold candidate.
This is because Humana's forward price-to-earnings (P/E) ratio of 16.6 is just below the healthcare plan industry average forward P/E ratio of 16.7. Humana's 14.6% annual earnings growth outlook is also moderately higher than the healthcare plan industry average of 12.8%. In other words, Humana is an above-average-quality stock that can be acquired at an average valuation.
One metric is often not enough by itself to prove the case that a stock is a buy. But Humana's trailing 12-month dividend yield of 0.64% is in line with its 10-year median of 0.67%. This is further proof that the stock is sensibly valued for long-term investors looking to build meaningful wealth.