There is a common expression in the investing community that winners keep on winning. In other words, stocks that have outperformed the market in the past are likely to continue doing so.
Health insurer Elevance Health (ELV -1.00%), formerly known as Anthem, has certainly been a huge winner in the past 10 years. A $10,000 investment made in the stock a decade ago would now be worth nearly $84,000, which is good enough for a 23.7% compound annual growth rate. And it looks like Elevance is poised to remain a winner. Here's why.
An incredibly consistent business
Late last month, Elevance Health reported its financial results for the second quarter, ended June 30. Once again, the company exceeded analysts' forecasts. Elevance generated $38.5 billion in operating revenue in Q2, which was 15.6% higher than the year-ago quarter. This came in slightly above the average analyst prediction of $38.1 billion. That was the seventh out of the past 10 quarters that Elevance managed to exceed analysts' estimates.
The company once again benefited from the well-documented trends. Growing healthcare costs and an aging population with more chronic medical conditions have led more consumers to purchase health insurance in recent years. That explains how the company's total medical membership surged 6.1% higher year over year to 47.1 million members. Operating revenue was also helped by premium hikes and the acquisitions of Paramount Advantage and MMM Holdings. Both of these companies offer Medicare Advantage plans.
Elevance Health logged $8.04 in non-GAAP (adjusted) diluted earnings per share (EPS) during the period, up 14.4% from the year-ago period. The average analyst was looking for adjusted diluted EPS of $7.74. This was the company's ninth EPS beat out of the last 10 quarters.
Aside from Elevance Health's higher operating revenue, two factors played into its adjusted diluted EPS results. First, the company's non-GAAP net margin fell 10 basis points year over year to 5.1% in Q2. This was due to a 16.2% uptick in its benefit expenses to $28.8 billion during the quarter stemming from claims filed by policyholders. This decreased profitability was partially offset by a 1.6% decline in Elevance's diluted share count to 243.4 million for Q2.
Thanks to the promising health insurance industry outlook, analysts believe that the company will produce 11.9% annual adjusted diluted EPS growth through the next five years.
A safe dividend with strong growth prospects
Elevance Health's 1% dividend yield is moderately lower than the S&P 500's 1.5% yield. But what the company lacks in immediate income, it makes up for with massive dividend growth potential.
That's because Elevance Health's dividend payout ratio is set to be 17.8% in 2022. This means the company is retaining the vast majority of its earnings, giving it plenty of capital for debt repayment, share repurchases, and acquisitions. This is why I'm confident that Elevance Health will deliver double-digit annual dividend growth for the foreseeable future, which makes it a great pick for dividend growth investors.
The stock is a bargain
Elevance Health is a fundamentally healthy business. And the stock doesn't appear to be getting enough credit from the market as evidenced by its forward price-to-earnings (P/E) ratio of 15.1. For context, this is meaningfully lower than the healthcare plan industry average forward P/E ratio of 16.9. At a minimum, Elevance Health should be trading in line with its peers. This makes the stock a compelling buy for long-term investors.