Picking the best stocks in industries with promising growth prospects is the not-so-secret strategy to build significant wealth over the long term as an investor.
Few industries arguably have as bright of a future as health insurance. Growing medical care costs and chronic medical conditions becoming more prevalent bode well for the industry. This is why the global health insurance industry is expected to compound at a 5.5% annual rate from $2.1 trillion in 2021 to $3 trillion by 2028.
And Humana's (HUM 0.51%) $55 billion market capitalization makes it the fifth-biggest publicly traded health insurer on the planet. But is the stock currently a buy? Let's take a look at Humana's fundamentals and valuation to decide.
A reputation for topping revenue and earnings estimates
When Humana shared its first-quarter earnings report on April 27 for the period ended March 31, the company exceeded the analyst consensus for both revenue and non-GAAP (adjusted) diluted earnings per share (EPS).
Humana generated $24 billion in revenue during the first quarter, which represents 16% growth over the year-ago period. This beat the $23.5 billion average analyst revenue forecast for the quarter. So how did the company surpass the analyst revenue consensus for the eighth quarter out of the past 10 quarters?
Secular tailwinds of the health insurance industry and Humana's scale led its medical enrollment to edge 1.1% higher year over year to 17.1 million in the first quarter. The other contributor to the company's revenue growth during the quarter were premium hikes to keep up with inflation.
Humana recorded $8.04 in adjusted diluted EPS in the first quarter, which was a 4.8% growth rate over the year-ago period. This trounced the average analyst prediction of $6.83 for the quarter, which was the 10th quarter out of the last 10 quarters that the company has done so.
Higher claims and operating costs caused Humana's non-GAAP net margin to fall 40 basis points year over year to 5.6% in the first quarter. This was partially offset by a 1.6% reduction in the outstanding share count to 127.5 million in the first quarter, which was the result of share repurchases.
Superb dividend growth potential
Humana's track record of outperforming analysts' expectations isn't the only reason to like the stock. Its low dividend payout ratio and high earnings growth prospects should translate into tremendous dividend growth.
Humana's dividend payout ratio is expected to be merely 12.5% in 2022. This leaves it with the funds necessary to complete acquisitions, repurchase shares, and pay down debt. Along with the encouraging health insurance industry outlook, this explains why analysts believe Humana will deliver 13.9% annual earnings growth through the next five years.
The stock's 0.7% dividend yield is well below the S&P 500 index's 1.6%. But its annual dividend growth potential in the teens more than makes up for the low starting yield.
Quality at a reasonable price
Humana is a world-class business based on its fundamentals. And the current valuation appears to provide a good entry point for investors.
That's because Humana's forward price-to-earnings ratio of 16 is only slightly higher than the healthcare plan industry average of 15.5. Since the stock's 13.9% annual earnings growth potential is higher than the industry average of 12.7%, this premium looks like it is well-deserved. That's what makes Humana an appealing buy for value investors.