Healthcare stocks have been a good sector for investors to turn to during an inflation-influenced market decline like the one we've experienced so far in 2022. Consumers can make adjustments to grocery lists, cut back on leisure activities, and delay bigger purchases if possible to offset some higher costs. Companies can also take action to save costs where possible or pass on higher costs through pricing to customers.
But one area where many are not willing to cut back -- especially after pandemic-driven delays in doctor's appointments and medical procedures -- is healthcare. Companies like Anthem (ANTM 0.99%) are benefiting from a rise in medical spending, and the portfolios of long-term investors could benefit from such healthcare stocks.
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Earnings are set to grow at a double-digit rate
On April 20, Anthem announced its first-quarter earnings; they displayed growth of 18% year over year, driven by a 7.5% increase in the number of members served. Larger employers that have used Anthem for a portion of their insurance offerings are now moving to Anthem for additional plan areas. Consolidating helps larger customers save by keeping all their plans under the roof of one insurer, and it provides members with consistency.
As a result, Anthem has seen a 750,000 increase in members through its commercial group's fee-based enrollment. That consolidation, along with expanded growth in Anthem's customer base, has led to 5 million plan members now receiving virtual primary care -- and that number is expected to double to 10 million by the end of this year. Based on those growth patterns, the company is projecting 2022 full-year earnings to increase 12% to 15%.
NYSE: ANTM
Key Data Points
The health insurance market is also set for growth
Supporting the company's projections for double-digit growth are projected growth in U.S. healthcare spending and a growing health insurance market. Pushed along by the COVID-19 pandemic, healthcare spending in the U.S. grew by 9.7% from 2019 to 2020, after averaging 4.2% per year for the previous 10 years. In 2021, that number subsided to 3.6% as federal public health spending pulled back.
The global health insurance market is expected to keep up the pace with a compound annual growth rate of 9.7% for the next seven years. That will double the market's value from just under $2 trillion now to $4 trillion in 2028. What's driving the growth is an increased focus on fighting diseases, such as cancer and diabetes, which gained more attention during the COVID pandemic.
COVID often caused greater impacts on people with preexisting conditions, making outcomes worse in many cases. The pandemic also led to the diagnosis of other health problems in patients being treated for COVID. The increased awareness is leading more people to take advantage of health insurance plans to avoid facing higher costs associated with treatment for those without them.
What's in store for the stock?
There are multiple reasons to like Anthem's stock. The share price hit an all-time high of $533 in mid-April. Since then it has pulled back, likely as a result of profit-taking at those levels as inflationary pressures took a grip and investors exhibited more caution. After a recent pullback from those mid-April highs, the share price was recently around $500.
That represents a buying opportunity that could provide a 25% gain, based on the high end of $642 among analysts' price targets. If the broader market continues to slide as it has this year, more investors will likely turn to safer equity investments, including those that pay dividends. Anthem currently offers an annual dividend yield of about 1% or $5.12 per share.
It's conceivable that several factors could lead to the share price hitting that upper end of analyst targets: a higher demand for dividend-paying stocks, the projected growth of Anthem's earnings, and the compound annual growth rate in the global health insurance market. The company has stated that as healthcare contracts expire, it will have the opportunity to raise prices in line with overall inflation. This could be another driver for increased revenue, and potentially be a catalyst for raised guidance in subsequent quarters.
A gain of 25% may not exactly be a skyrocket that gets investors racing to their institution of choice to buy shares. But what it could do is provide an opportunity for investor profit as well as quarterly income from dividends during what's been a hurtful market for many in 2022.
