Being a successful investor starts with figuring out why you are investing. Is it to gain financial independence for yourself? Is it more for the benefit of future generations? Answering these questions can help set you on the path toward achieving your financial goals and shape your investment philosophy.
Regardless of your financial goals, these two quality healthcare stocks could be smart buys to compound wealth over the long run. Let's take a look at why.
As of the second quarter, the company had nearly 27 million customers for medical, dental, vision, and other insurance. This allowed Humana to generate $47.6 billion in total revenue through the first half of 2022, which was a whopping 15.3% growth rate over the year-ago period.
And this tremendous revenue growth rate looks set to continue for Humana. That's thanks to rising medical care costs and an increasing prevalence of chronic medical conditions, which is boosting demand for health insurance over time. This is why Allied Market Research anticipates the global health insurance market will grow at a 9.7% annual rate, from $2 trillion in 2020 to $4.2 trillion in 2028.
Investors can also be confident that Humana's future revenue growth will push the company's profits upward as well. That's because it is a profitable business, posting a 5.8% non-GAAP (adjusted) net margin in the first half of 2022. This led the insurer's adjusted diluted earnings per share (EPS) to surge 14.7% higher year over year to $16.70 for the first half of the year.
These factors explain why analysts believe Humana's adjusted diluted EPS will compound at a 14.2% annual rate each over the next five years. Since the company's dividend payout ratio is poised to be just above 12% in 2022, Humana's dividend should grow at a low-double-digit annual clip for the foreseeable future. This arguably compensates for the dividend yield of 0.7%, which is less than half of the S&P 500 index's 1.6%.
And Humana's forward price-to-earnings (P/E) ratio of 17.4 is barely above the healthcare plan industry's average forward P/E ratio of 16.6. This is a sensible valuation for the stock, which is why it appears to be a buy and hold for long-term investors.
2. Abbott Laboratories
Few healthcare companies are as diversified as Abbott Laboratories (ABT 0.44%) in terms of industries and geography. Selling medical devices, diagnostic tests (e.g., COVID-19 rapid test kits), consumer-facing products (e.g., baby formula), and generic pharmaceuticals, the company has operations in more than 160 countries around the world. This is how Abbott recorded $23.2 billion in total revenue for the first half of this year, which was up 12% year over year.
The necessity of these products to patients and consumers the world over builds in pricing power for the company. Along with increasing product demand via an aging, growing global population, that's why analysts are expecting 11% annual adjusted diluted EPS growth over the next five years.
Aside from the company's strong earnings growth prospects, Abbott can provide income investors with a 1.7% dividend yield. And with the Dividend King's payout ratio set to be 37.3% in 2022, there should be plenty of room for future payout hikes.
Abbott Laboratories is a world-class business, yet its forward P/E ratio of 23.3 is slightly below the medical device industry average of 24.3. This makes the stock a buy for dividend growth investors.