Operating in a growing industry is essential for a company to produce exceptional revenue and earnings growth.
And with steadily rising healthcare costs plus an expanding global population, few industries are as promising as health insurance. Healthcare industry analysts anticipate the global health insurance industry to grow at an annual rate of 6.6%, from $2.1 trillion in 2021 to $3 trillion by 2028.
As the largest health insurer in the world with a market capitalization of $469 billion, UnitedHealth Group (UNH -0.40%) is best positioned to cash in on the encouraging industry growth outlook. But should investors add the stock to their portfolio? Let's dig into UnitedHealth Group's fundamentals and valuation to answer this question.
UnitedHealth Group exceeded expectations again
When it reported first-quarter earnings for the period ended March 31, UnitedHealth Group managed to beat the average analyst forecast for both revenue and adjusted diluted earnings per share (EPS).
The Minnesota-based health insurer posted $80.1 billion in total revenue in the first quarter, representing a 14.2% growth over the year-ago period, topping consensus estimates of $78.8 billion. So how did UnitedHealth Group surpass the average analyst revenue estimate for the eighth quarter out of the last 10?
Thanks to the increasing demand for health insurance, UnitedHealth Group's medical insurance customer base grew 3% year over year to 51 million customers at the end of the first quarter. Along with price hikes passed on to customers, it explains the company's impressive total revenue growth.
UnitedHealth Group recorded $5.49 in adjusted diluted EPS for the first quarter, a 3.3% growth against the year-ago period. This eclipsed the average analyst prediction of $5.38, which was the 10th time out of the past 10 quarters that the company has done so.
As more customers returned to the healthcare system due to widely available COVID vaccines and treatments, medical claims costs surged 17% higher year over year to $52.5 billion during the first quarter. This led UnitedHealth Group's non-GAAP (generally accepted accounting principles) net margin to fall 70 basis points to 6.5% in the first quarter, which explains why adjusted diluted EPS growth lagged total revenue growth.
Over the next five years, Wall Street analysts expect UnitedHealth Group to deliver 14.6% annual earnings growth.
Image source: Getty Images.
A safe dividend with significant growth potential
UnitedHealth Group's above-average growth prospects should also translate into strong dividend growth.
With the stock's dividend payout ratio only at 29.4% in 2021, UnitedHealth has the flexibility to at least grow its dividend in line with its earnings. And the company also retains enough earnings to execute acquisitions and repay debt to drive its profitability higher over time.
That's why I believe UnitedHealth Group will continue to hand out annual payout increases in the low- to mid-teen range for the foreseeable future. The stock's 1.1% dividend yield won't knock your socks off, but it definitely has the growth profile to compensate for its lower starting yield.
The premium isn't excessive
UnitedHealth Group is a high-quality business. And even with the 28% rally in its stock over the last year, UnitedHealth Group looks like a reasonable value.
This is because UnitedHealth Group's forward price-to-earnings (P/E) ratio of 20.2 is only moderately higher than the healthcare-plan industry average forward P/E ratio of 15.6. For context, UnitedHealth Group's 14.6% annual earnings growth potential is notably higher than the industry average of 12.8%. This makes the stock worthy of consideration for dividend growth investors.
