The name of the game in investing is to build life-changing wealth. This can be done by picking quality stocks, consistently investing additional capital, and holding for the long haul.
As a component of the Dow Jones Industrial Average, managed care company UnitedHealth Group (UNH 1.33%) fits the definition of a quality stock. But after gaining 7% last year, is the stock still a buy for growth investors? Let's check into UnitedHealth's fundamentals and valuation to find out.
Another quarter of excellent growth
As of Dec. 31, UnitedHealth Group served 151 million unique customers across its UnitedHealthcare health insurance business and Optum technology services business. Unsurprisingly, this tremendous size and scale is responsible for the company's $463 billion market capitalization. For context, this is a staggering 4 times larger than the $117 billion market cap of the next biggest health insurer, CVS Health.
UnitedHealth Group's total revenue surged 12.3% higher over the year-ago period to $82.8 billion in the fourth quarter. How did the half-trillion-dollar company put up such spectacular top-line growth during the quarter?
An aging and rising global population is working in UnitedHealth Group's favor. By itself, these factors are lifting the demand for the company's products and services. This explains how UnitedHealthcare's medical membership increased 2.1% year over year to 51.7 million for the fourth quarter. Optum's consumers served count also edged up 2% over the year-ago period to 102 million in the quarter. Along with price hikes that were passed onto its customer base, this led UnitedHealth Group's total revenue to compound at a double-digit clip during the quarter.
The managed care company recorded $5.34 in non-GAAP (adjusted) diluted earnings per share (EPS) for the fourth quarter. That is a 19.2% year-over-year growth rate. UnitedHealth Group's non-GAAP net margin expanded 30 basis points in the quarter to 6.1%. This improved profitability paired with a 0.8% reduction in the company's diluted outstanding share count resulted in adjusted diluted EPS growth significantly outpacing revenue growth during the quarter.
With analysts projecting 14.1% annual adjusted diluted EPS growth from UnitedHealth Group over the next five years, robust growth appears poised to continue moving forward. This is moderately above the healthcare plans industry average growth forecast of 12.5%.
Image source: Getty Images.
UnitedHealth Group can deliver sizzling future dividend growth
UnitedHealth Group currently offers investors a 1.4% dividend yield. Stacked up against the S&P 500 index's 1.7%, this doesn't look like an income investor's dream stock. Looks can be deceiving, however.
UnitedHealth Group's dividend payout ratio came in at just 28.8% in 2022. Such a low dividend obligation affords the company the opportunity to complete future acquisitions and repay debt to strengthen its fundamentals even more. That is why I would be shocked if UnitedHealth Group didn't announce dividend hikes in the range of 15% to 20% annually for the medium term.
The stock's premium valuation is well earned
UnitedHealth Group has had a slow start to 2023, falling 6% year to date. But this has arguably created a great buying opportunity for investors.
This is because UnitedHealth Group's forward price-to-earnings (P/E) ratio of 17.3 is only somewhat higher than the healthcare plans industry average forward P/E ratio of 14.8. Given the company's status as the leading health insurer and its above-average growth potential, this premium valuation is certainly justified in my opinion.
