The Dow Jones Industrial Average is an index of 30 of the most elite businesses on the planet. But not all of these businesses' underlying stocks have delivered similar results over the past decade.
A $10,000 investment in health insurer UnitedHealth Group (UNH -0.42%) in December 2012 would have been worth a staggering $117,000 as of a few weeks ago. That's far superior to the $32,000 that the Dow Jones index as a whole would have turned that same amount into over that time.
And UnitedHealth looks poised to offer similar outperformance in the years ahead. Let's delve into the company's fundamentals and valuation to elaborate further.
The dominant player in a thriving industry
UnitedHealth Group's health insurance segment UnitedHealthcare and technology services segment Optum each work with healthcare providers, governments, and employers to serve 149 million people around the world.
Just how big is the company? With its $458 billion market capitalization, UnitedHealth Group is the largest health insurer on the planet. Putting it into perspective, the company's market capitalization is greater than those of all of its publicly traded competitors combined by $10 billion.
What really sets UnitedHealth apart as an investment is that it not only is the most established company in its industry, but the industry itself is larger than even the most seasoned investors might realize. That's because with the trends of global population growth and aging, more individuals will rely on UnitedHealth Group's products and services as the years unfold.
These factors explain why the market research firm Facts & Factors projects that the global health insurance market will grow 9.5% annually from $2.1 trillion in 2021 to top $3.6 trillion by 2028.
As UnitedHealth picks up new customers from a combination of the aforementioned trends and future acquisitions, non-GAAP (adjusted) diluted earnings per share (EPS) growth should remain robust. Analysts are forecasting that the company's adjusted diluted EPS will increase at 14.2% annually over the next five years. This is superior to the healthcare plans industry's average earnings growth prediction of 12.5%.
Image source: Getty Images.
Outsized dividend growth could continue
Stacked against the 2.5% average dividend yield of the Dow Jones index, UnitedHealth Group's 1.4% yield is low. But don't be deceived. The dividend yield is low for a couple of good reasons.
First, the stock's share price has grown much more than the annual dividend per share over the last decade, growing 11-fold and 8-fold, respectively. This has kept the dividend yield lower compared to those of other investment indices that it has trounced for many years now.
Second, UnitedHealth's dividend payout ratio is set to be approximately 29% in 2022. This gives the company a great degree of flexibility to grow its dividend at a faster clip than earnings over the medium term. That is because UnitedHealth has more than enough capital at its disposal for acquisitions, debt repayment, and share repurchases. These variables explain why I would be shocked if the dividend didn't grow at least 15% to 20% annually over the next few years.
A sensible valuation for unmatched quality
UnitedHealth Group is a world-class business. This is reflected in the current valuation of its stock -- but not excessively in my opinion.
Its forward price-to-earnings ratio of 19.7 is materially above the healthcare plans industry average of 15.4. However, the company's unsurpassed quality and influence over its industry arguably justify this first-rate valuation. This is why I believe UnitedHealth Group is a wonderful dividend growth stock pick in 2023 and beyond.
