Dividend growth can act as a litmus test for the quality of a business. After all, a company can only grow its dividend over the long haul if its profits are also rising.
The managed care business known as Elevance Health (ELV 0.15%) recently announced that it would be sending an extra 15.6% in quarterly dividends per share to its shareholders with the next payment. Let's dig into three reasons why the stock is a no-brainer pick for dividend growth investors.
1. Elevance Health is a leader in a massive industry
Elevance Health serves over 119 million customers through its Anthem Blue Cross and Blue Shield Affiliated health plans and healthcare services business, called Carelon. This massive customer base explains how the company, with its $113 billion market capitalization, has become the second-biggest publicly traded health insurer in the world behind UnitedHealth Group.
Outside of UnitedHealth Group, Elevance Health will be the biggest beneficiary of the health insurance industry's favorable trends. Thanks to a mounting global disease burden and the increasing use of the internet to shop for plans, the global health insurance market has multiple catalysts going for it in the years ahead. That's why market research company Precedence Research projects that the global health insurance industry will compound at 6.8% annually from $2.2 trillion in 2022 to $3.8 trillion by 2030.
The average 2023 revenue estimate of $164.4 billion may seem to be huge in absolute terms for Elevance Health. But it's not even a 7% share of the $2.4 trillion in revenue that the global health insurance market will take in for the year. Organic growth from increased demand for health insurance coupled with acquisition activity should help Elevance Health build on its market share moving forward.
These factors are behind the average annual analyst non-GAAP (adjusted) diluted earnings per share (EPS) growth forecast of 12.4% over the next five years. For context, that is similar to the healthcare plans industry average annual adjusted diluted EPS growth consensus of 12.5%.
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2. Elevance's outsized dividend growth should persist
Elevance Health's 1.3% dividend yield may not attract the attention of income investors when compared to the S&P 500 index's 1.7% yield. But it certainly should for those with longer investment timeframes: Elevance Health's quarterly dividend per share has nearly quadrupled from $0.375 in 2013 to $1.48 now. With the most recent dividend growth rate coming in above the 10-year average annual dividend growth rate of 14.7%, dividend growth appears to be accelerating.
ELV Dividend data by YCharts
That's not surprising when considering that Elevance Health's dividend payout ratio is expected to come in at just 18% in 2023. This leaves the company with more than enough funds to invest in potential growth opportunities and reduce debt. I would expect more of the same for dividend growth in the future.
3. The stock is a solid value
While the broader markets have shed some value over the last year, shares of Elevance Health have edged 4% higher during that time. Still, the stock remains a buy for investors seeking high dividend growth.
Elevance Health's forward price-to-earnings (P/E) ratio of 12.7 is less than the healthcare plans industry average forward P/E ratio of 13.4. For a leading health insurer with average growth prospects, the stock should arguably be trading at a valuation multiple more in line with or slightly ahead of its peers.
