Building wealth in the stock market can be as simple as picking quality businesses in growing industries and holding for the long haul. Decent execution from a business in a promising industry often translates into ever-higher revenue and earnings, which also leads to share price growth over time.
With high inflation in healthcare and more people developing chronic medical conditions, demand for health insurance will keep growing. This is why the market research firm Global Market Insights anticipates that the global health insurance industry will expand at 4.6% each year from $2.8 trillion in 2020 to $3.9 trillion by 2027.
The managed care company, Elevance Health (ELV 0.13%), is up 16% year to date. This is a stark contrast compared to the S&P 500 index's 19% decline so far in 2022. And as impressive as the stock's performance has been in 2022, it also looks like it will be a winner over the long run. Here's why.
The company has a strong growth profile
Elevance Health boasts a total customer base of 119 million for its Anthem Blue Cross and Blue Shield and Wellpoint medical insurance plans and its healthcare services called Carelon. Along with a $125 billion market capitalization, this makes the company the second-largest health insurer in the world behind UnitedHealth Group.
Elevance recorded $39.6 billion in operating revenue for the third quarter ended Sept. 30. For context, this was up 11.5% year over year. What was behind the company's admirable operating revenue growth during the quarter?
Thanks to the tailwinds boosting health insurers, Elevance Health's medical membership increased 4.9% over the year-ago period to 47.3 million members. According to the company's chief financial officer, Gail Boudreaux, this solidified Elevance Health's status as the largest medical carrier by membership in the U.S.
This was driven by expanding its footprint into an additional 210 counties within the 14 states that it serves. Being the largest medical carrier in the U.S. also allowed the company to increase its health insurance premiums to keep up with rising medical costs. This resulted in the double-digit lift in operating revenue in the quarter.
Elevance Health's non-GAAP (adjusted) diluted earnings per share (EPS) surged 10.9% higher for the quarter to $7.53. As a result of inflation, the company's cost of products sold rose faster than operating revenue. This led to a 10-basis-point decline in non-GAAP net margin to 4.6% during the quarter. Elevance Health's decline in profitability wasn't completely offset by a 1.5% reduction in its outstanding share count to 242.2 million in the quarter. That's how adjusted diluted EPS growth lagged behind operating revenue growth.
Looking out over the next five years, analysts are projecting that Elevance Health's annual adjusted diluted EPS growth will remain similar-- at 11.9%. That is because of the rising demand for health insurance and healthcare services provided by the company.
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Rapid dividend growth can persist
Compared to the S&P 500 index's 1.7% dividend yield, Elevance Health's 1% yield may not be appealing to income investors focused on the immediate future. But for those with time to let the dividend quickly grow, Elevance Health is an interesting pick.
This is due to the fact that the company's dividend payout ratio will be less than 18% in 2022, providing Elevance Health with the necessary funds to grow the business, reduce debt, and complete share buybacks. With such a low payout ratio, I am confident that low- to mid-teens annual dividend growth can be maintained for many more years.
A solid value stock
Elevance Health appears to still be a wealth-minting machine. The company is masterfully expanding its health plan offerings to more counties throughout the country, building on its competitive advantage in the U.S. And yet, the stock is arguably a decent value as well.
Elevance Health's forward price-to-earnings ratio of 16.3 is a touch below the healthcare plan industry average of 17.1. This valuation more than takes into consideration that the company's 11.9% annual earnings growth prospects are basically in line with the industry average of 12.6%. This makes Elevance Health a blue chip stock to buy now and hold for a long while.
