The increasing likelihood of a global recession has caused financial markets to sour in 2022. Down 21% year to date, the S&P 500 index has fallen into a bear market. But not all sectors have fared as poorly.
Tracking the largest and most dominant healthcare companies in the world, the Health Care Select Sector SPDR Fund (XLV -0.76%) is down just 7% so far this year. This is likely because the necessity of healthcare for global health and wellness makes it a largely recession-proof sector of the economy.
The second-largest holding in the fund is the health insurer UnitedHealth Group (UNH -1.16%), which is up 8% year to date. And the health insurer's outperformance is likely to continue. Here are three reasons why.
1. Secular tailwinds should persist in the future
Serving customers in more than 130 countries around the world, UnitedHealth Group is the largest managed-care insurer in the world. Through its UnitedHealthcare segment, the company's health insurance products alone accounted for more than 50 million customers. Including its health technology and analytics segment known as Optum, which serves governments, healthcare providers, and employers, UnitedHealth boasts an astonishing customer base that is 149 million strong.
The mega-cap company generated $80.9 billion in revenue during the third quarter. For context, this was 11.8% higher year over year. What contributed to its healthy growth for the quarter?
Rising costs of medical care continued to drive more customers toward UnitedHealth Group's health insurance offerings. This is because beyond the annual deductible of a health insurance plan, insurers assume much of the financial risk on behalf of customers. That's how the company's total medical membership base grew 1.8% over the year-ago period to 51.3 million in the quarter. Along with premium hikes and double-digit growth in Optum revenue, this explains UnitedHealth's robust revenue growth during the third quarter.
The company logged $5.79 in non-GAAP (adjusted) diluted earnings per share (EPS) for the quarter, which was up 28.1% year over year. Because medical claims grew at a slower rate than revenue in the quarter, this led UnitedHealth Group's non-GAAP net margin to expand 80 basis points over the year-ago period to 6.8%. Combining this with a 0.7% reduction in the diluted weighted-average share count to 948 million during the quarter, adjusted diluted EPS grew at a faster clip than revenue.
As long as humanity continues, so too will healthcare. And UnitedHealth is at the forefront of the sector, providing health insurance to customers and leveraging its Optum business to help the entire healthcare system be more efficient. As the global population ages and requires more care, UnitedHealth will only become more necessary. That's why analysts are forecasting 14.2% annual adjusted diluted EPS growth over the next five years from the company.
2. The dividend has plenty of room for growth
Considering that the S&P 500 index now offers a 1.7% dividend yield, UnitedHealth likely won't blow investors away with its 1.2% yield. But if investors can look beyond the current income that UnitedHealth can deliver and focus on its future dividend growth, the stock is arguably an attractive pick.
That's because UnitedHealth's dividend payout ratio is expected to come in at 29.1% in 2022. Not only does this give the company the funds necessary to repay debt and invest in expanding its operations, but it also provides a comfortable buffer if profits were ever to decline temporarily. This is why I believe UnitedHealth will hand out dividend hikes at least in line with earnings growth over the medium term.
3. A fair valuation for a gem of a business
UnitedHealth Group appears to be a company that is firing on all cylinders; the top line is steadily growing, while improved operating efficiency is leading profits higher.
The stock's forward price-to-earnings ratio of 21.4 is sharply higher than the healthcare-plan industry's average of 16.7. But the company's earnings are projected to grow faster -- at a 4.2% annual rate versus 12.6% for the overall industry. With its top-notch growth potential and industry leadership, UnitedHealth Group deserves every bit of its premium valuation.