Buying companies that steadily grow their revenue and earnings at reasonable valuations is the key to success as a long-term investor.
Despite its $119 billion market capitalization and status as the world's third-largest publicly traded health insurer, Anthem (ELV 1.19%) still has plenty of growth left in its future. But is the stock a buy? Let's dig into Anthem's fundamentals and valuation to find out.
A reputation of surpassing expectations
On April 20, Anthem reported excellent first-quarter earnings results.
The company recorded $38.1 billion in total revenue for the quarter, equivalent to a 17.6% year-over-year growth rate. This was narrowly higher than the analyst revenue consensus of $37.3 billion and marked the seventh quarter out of the last 10 that Anthem beat the average analyst revenue prediction.
Two factors led to this impressive revenue growth rate for the first quarter. First, thanks to increased demand for health insurance, Anthem's total medical membership increased 7.5% year-over-year to 46.8 million. Along with this much larger medical membership base, Anthem hiked the premiums due from its members to keep up with rising medical care costs.
The company produced $8.25 in non-GAAP (adjusted) diluted earnings per share (EPS) in the first quarter, which represents a 17.7% growth rate over the year-ago period. This topped the average analyst earnings estimate of $7.81, which was the eighth quarter out of the past 10 that Anthem exceeded the analyst earnings consensus.
Aside from the higher revenue base, there were two variables in play. Due to a 19.1% year-over-year increase in benefit expenses to $28.2 billion in the first quarter, Anthem's non-GAAP net margin declined 10-basis points to 5.3%. But because of a 1.5% reduction in the outstanding diluted share count over the year-ago period to 244.4 million, the company's adjusted diluted EPS was still able to grow ahead of revenue.
And analysts believe that demand for Anthem's health insurance plans will grow as healthcare becomes more expensive. This should drive further growth and explain why analysts expect 12.6% annual earnings growth through the next five years.
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The dividend obligation is very low
Given that Anthem's dividend payout ratio is expected to be 18% in 2022, its promising growth outlook isn't the only thing the stock has going for it.
This should translate into dividend growth that somewhat outpaces earnings growth for the foreseeable future. Anthem is retaining more than enough earnings to complete acquisitions, repay debt, and execute share buybacks to keep its adjusted diluted EPS trending upward.
Anthem's 1% dividend yield means it probably won't be a fit for investors that require immediate income. But the stock's prospects of mid-teens annual dividend growth make it a good pick for dividend-growth investors.
A superior stock at a below-average valuation
Anthem also looks like a decent value at the current share price of $491. The stock is trading at a forward price-to-earnings (P/E) ratio of 17.2, which is slightly lower than the S&P 500 index's 17.5 forward P/E ratio. The stock looks like a buy right now because Anthem offers investors above-average growth prospects compared to the S&P 500 index at a below-average valuation.
