It's been a tough year for the stock market. Various economic and geopolitical factors have pressured shares throughout 2022, leading the S&P 500 index to slump 19% year to date.
But while many stocks have struggled this year, a few have fared incredibly well. Shares of the managed care company UnitedHealth Group (UNH 1.35%) actually edged 4% higher so far in 2022. And as well as the healthcare stock has held up this year, there's reason to believe that 2023 and beyond could be still more promising.
Let's take a closer look at UnitedHealth Group's fundamentals and valuation to unpack why this could prove to be the case.
A winning business model and perennial outperformer
UnitedHealth Group's $511 billion market capitalization makes it slightly larger than all of its publicly traded competitors put together. The company is split into two separate segments: health insurance via UnitedHealthcare and data and technology services through Optum. Together, these two businesses work alongside governments, employers, and healthcare providers to serve nearly 150 million people around the world.
What could possibly be better than enjoying the status as the most dominant company in your industry? Well, the global health insurance market is also massive and thriving. As the population ages and more people are diagnosed with chronic diseases, the need for healthcare and health insurance will only grow. This is why market research firm Fortune Business Insights believes that the global health insurance market will soar from $2.1 trillion in 2021 to top $3 trillion by 2028.
These characteristics are precisely what has led UnitedHealth Group to beat the S&P 500 in an astonishing nine out of the last 10 years, including 2022.
And as big as UnitedHealth Group currently is, the $323.8 billion in revenue that analysts expect from the company for 2022 is only approximately 15% of the global health insurance market. The company should both organically grow from new customers entering into the market and from bolt-on acquisitions moving forward.
That explains how analysts expect revenue to grow at a 10% clip in 2023. Along with share buybacks and improvements in profitability, this is why analysts are forecasting 13.3% growth in UnitedHealth Group's non-GAAP (adjusted) diluted earnings per share (EPS) in 2023.
Looking out beyond 2023, analysts anticipate that the company's adjusted diluted EPS will compound at 14.2% annually through the next five years. For context, this is meaningfully greater than the healthcare plans industry average earnings growth projection of 12.5%.
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A modest payout ratio should fuel explosive future dividend growth
UnitedHealth Group's 1.3% dividend yield is significantly below the S&P 500 index's 1.7% yield. But don't let the company's modest dividend fool you. This could be an excellent income stock of tomorrow.
That is because UnitedHealth Group's dividend payout ratio will clock in around 29% for 2022. This leaves the company with more than enough capital to invest in future growth opportunities and pay down debt. And it should also allow UnitedHealth Group to deliver mid- to upper-teens percentage dividend hikes for the next several years.
The premium valuation is fair and warranted
Amid the market decline, UnitedHealth Group has had a nice run-up. And yet, the stock doesn't appear to be excessively valued. Analysts have a 12-month price target of $598, which would represent 13% upside from the current $528 share price.
UnitedHealth Group's forward price-to-earnings ratio of 21.6 is well above the healthcare plans industry average of 16.7. But with its unmatched size and scale, and superior growth prospects, this is arguably a well-deserved premium to its peers. That's why dividend growth investors would be wise to consider buying the stock ahead of 2023.
