The whole purpose of investing is to put your money to work for you so that one day you won't have to work as hard. When done right and given enough time, a growth investing strategy can do just that.
A $10,000 investment in health insurer Humana (HUM -1.75%) made 10 years ago would be worth $65,000 today with dividends reinvested. This is a vastly superior investment outcome compared to the $32,000 that the same investment amount would be worth if it were invested in the S&P 500 index 10 years ago.
Past performance isn't a guarantee of future results. But Humana still appears poised to be a growth stock with a very bright future. Here's why.
1. Industry growth is fueling revenue and earnings growth
Health insurance is growing more important around the world for numerous reasons, including an aging population that is prone to more medical conditions and rising costs of healthcare services. This is why market researcher Imarc Group anticipates that global health insurance industry revenue will grow 7.1% annually from $1.7 trillion in 2022 to nearly $2.6 trillion by 2028.
With 22.3 million members of its medical, dental, vision, and other supplemental benefits plans, Humana has been and should continue to be a beneficiary of this positive industry outlook. The company boasts a $64 billion market capitalization, which positions it as the fifth-largest health insurer on the planet.
Humana's revenue increased 6.6% year over year to $22.4 billion during the fourth quarter ended Dec. 31. The company's total medical membership grew 0.1% over the year-ago period to 17.1 million. This was driven by 3.2% growth in total Medicare Advantage membership for the quarter. Along with premium hikes, this propelled Humana's revenue upward in the quarter.
Humana recorded $1.62 in non-GAAP (adjusted) diluted earnings per share (EPS) during the fourth quarter, which was a blistering 30.6% year-over-year growth rate. Improved profitability resulted in a nearly 40 basis point rise in non-GAAP net margin to 1.2% for the quarter. This explains how adjusted diluted EPS growth outpaced revenue growth in the quarter.
Organic membership growth from trends discussed above paired with bolt-on acquisitions should translate into exceptional future growth for Humana. Analysts believe that the company's adjusted diluted EPS will compound at 14.3% annual rate over the next five years. Putting this into perspective, that is moderately better than the healthcare plans industry average earnings growth outlook of 12.4%.
2. High dividend growth lies ahead
HUM Dividend data by YCharts
Stacked against the S&P 500 index's 1.6% dividend yield, Humana's 0.6% yield appears to be lacking at first blush. But with the quarterly dividend per share tripling over just the last 10 years to $0.7875, growth is what sets Humana apart.
And since the dividend payout ratio clocked in at a mere 12% in 2022, the dividend has almost nowhere to go but up. This is because such a modest payout ratio leaves Humana with the funds needed to expand the business and strengthen the balance sheet. That's arguably why the company should have no difficulty in delivering more double-digit dividend boosts in the medium term.
3. The stock's valuation is a steal
Humana is a demonstrably great business. Yet, the stock's valuation still doesn't look to be high enough. Humana's forward price-to-earnings ratio of 15.4 is only slightly above the healthcare plans industry average of 14.2.
Considering that the company's growth prospects are materially higher than the industry average, this attractive valuation multiple makes Humana stock a buy for growth investors.
