All dividend growth stocks have at least this factor in common -- they consistently earn a profit. If this weren't so, it would be impossible to sustain continued dividend growth.
Operating as a leader in the health insurance industry, Elevance Health (ELV 1.09%) is arguably one of the highest-quality dividend growth stocks in the world. But is the stock currently a buy for dividend growth investors? Let's look at Elevance Health's fundamentals and valuation to answer this question.
Rising demand for health insurance is driving growth
The same trend that has driven 21.8% annual non-GAAP (adjusted) diluted earnings per share (EPS) for Elevance Health over the last five years appears poised to continue. This is, of course, the tremendous organic growth in the demand for health insurance services that the company provides to nearly 120 million customers.
The increasing prevalence of chronic diseases throughout the world bodes well for the health insurance market. This is why market research firm Vantage Market Research anticipates that the global health insurance industry will grow by 4.4% each year from $2.6 trillion in 2021 revenue to $3.3 trillion by 2028.
As a result, it shouldn't be shocking to learn that Elevance Health's operating revenue grew 10.1% year over year to $39.7 billion in the fourth quarter of 2022. This robust growth in operating revenue was driven by a 4.8% increase over the year-ago period in total medical membership to 47.5 million during the quarter. The company also hiked premiums earlier in the year, allowing it to score double-digit operating revenue growth for the quarter.
Elevance Health posted $5.23 in adjusted diluted EPS in the fourth quarter, which was up 1.8% over the year-ago period. Because the company's total expenses grew at a faster rate than operating revenue, non-GAAP net margin contracted nearly 30 basis points to 3.2%. This decline in profitability was more than offset by a 1.8% reduction in Elevance Health's outstanding share count during the quarter. This explains how the company's adjusted diluted EPS growth lagged operating revenue growth for the quarter.
Due to Elevance Health's positioning as a major player in a promising industry, analysts expect 11.9% annual adjusted diluted EPS growth for the next five years. This is about the same as the healthcare plans industry average earnings growth projection of 12.4%.
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Excellent dividend growth can continue
Stacked against the S&P 500 index's 1.7% dividend yield, Elevance Health's 1.2% yield is modest in appearance. But looks can be deceiving.
That's because Elevance Health's dividend payout ratio clocked in at just 17.6% in 2022. This allows the company to retain enough capital to execute bolt-on acquisitions, engage in share repurchases, and repay debt. That's why I believe Elevance Health's dividend will have no problem growing 10% to 15% each year for the medium term.
The stock is rationally valued
Up 13% over the past year, Elevance Health has done quite well for shareholders. However, the stock seems to still be a buy for dividend growth investors.
Elevance Health's forward price-to-earnings (P/E) ratio of 13.3 is slightly below the healthcare plans industry average of 14.5. Given the company's essentially average growth prospects, this is a sensible valuation for investors looking to meaningfully grow both their passive income and wealth over the long haul.
