In the Information Age, there is no lack of resources out there to help guide investment decisions. However, a great deal of data can be a double-edged sword. Investors can sometimes be so overwhelmed with an abundance of perspectives that they can miss out on investing opportunities.
The good news is that investing doesn't have to be difficult. Buying quality businesses at a favorable valuation and holding them for the long run is the formula for success as an investor.
Health insurer Cigna (CI 0.93%) is precisely what a top-notch company looks like. Here's why the stock could be a smart buy for dividend growth investors.
A strong industry outlook is fueling growth
The health insurance industry is poised to continue thriving in the years to come. This is because the increasing costs of healthcare services and higher rates of chronic diseases are driving more people to purchase health insurance as a hedging factor. That's why market research firm IMARC Group anticipates that the global health insurance market will compound at 7.1% each year, from $1.7 trillion in 2022 to $2.6 trillion by 2028.
With nearly 190 million total customer relationships as of Dec. 31, 2022, Cigna is among the largest health insurers in the world. The Connecticut-based company's $89 billion market capitalization makes it the fourth-biggest healthcare plans business on the planet. This positions Cigna to be one of the major winners from the rising demand for health insurance.
The managed care company's total revenue edged 0.1% higher year over year to $45.8 billion for its fourth quarter (ended Dec. 31, 2022). This was driven by a 2.2% increase over the year-ago period in total customer relationships to 189.7 million. A 1.6% reduction in pharmacy customers at the start of 2022 was more than offset by a 5.4% year-over-year growth rate in total medical customers to 18 million. That explains how Cigna's total revenue rose in the quarter.
The company's non-GAAP (adjusted) diluted earnings per share (EPS) grew 4% over the year-ago period to $4.96 during Q4. Cigna's non-GAAP net margin fell by more than 10 basis points year over year to 3.3% for the quarter. But a 7.3% reduction in its weighted-average share count made up for lower profitability in the quarter. That allowed Cigna's adjusted diluted EPS growth to top revenue growth during the quarter.
Positive industry trends coupled with bolt-on acquisitions bode well for the managed care company. That's why analysts believe that Cigna's adjusted diluted EPS will increase by 11.3% annually through the next five years. Putting this into perspective, that's just below the healthcare plans industry average earnings growth projection of 12.4%.
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The dividend can keep growing
Cigna's 1.6% dividend yield is in line with the S&P 500 index's 1.6% yield. But unlike the index, the health insurer has the capacity to hand out many more dividend hikes like its most recent of 10% to shareholders moving forward.
That's because it is projected that Cigna's dividend payout ratio will come in below 20% for 2023. This leaves the company with the funds needed to invest in future growth opportunities while also improving its financial health and further reducing its share count.
A deeply discounted valuation
While the broader markets have declined over the last year, shares of Cigna rocketed 31% higher during that time. Yet, the stock still looks to be a bargain for dividend growth investors.
Cigna's forward price-to-earnings ratio of 10.7 is well below the healthcare plans industry average of 14. Even considering that the company's growth prospects are slightly lower than the healthcare plans industry average, this significantly discounted valuation makes the stock a buy.
