While the stock market tends to appropriately value stocks over the long run, this is far from always the case in the short term. The element of human emotion can often send stocks soaring or plunging beyond anything that their fundamentals would justify.
After a difficult 2022, the S&P 500 index has edged 8% higher so far this year. Elevance Health (ELV 0.15%), however, has declined 10% year to date. But based on its fundamentals and valuation, is the health insurer a buy for dividend growth investors near its 52-week low?
The business continues to thrive
Elevance Health's $110 billion market capitalization positions it as the second largest healthcare plan company in the world, trailing only UnitedHealth Group's $455 billion market cap. (If the name Elevance is unfamiliar to you, and you're wondering how you've never heard of such a giant, until last June, it went by the name Anthem.) Elevance Health had a membership base of more than 48 million medical plan members as of March 31 to support that valuation.
| Q1 2022 Medical Membership | Q1 2023 Medical Membership | Growth Rate |
|---|---|---|
| 46.8 million | 48.1 million | 2.9% |
Data Source: Elevance Health Q1 2023 earnings press release.
The Indiana-based managed care company recorded $41.9 billion in operating revenue in the first quarter, up 10.6% over the year-ago period.
What was behind Elevance Health's double-digit top-line growth? It again benefited from industry growth catalysts such as increased internet use to purchase health plans and the growing prevalence of chronic medical conditions. This is what propelled Elevance Health's medical membership base higher to 48.1 million members during the quarter. That, in combination with higher premiums for its medical plans and growth in members served and prescription volume in its Carelon healthcare services business, explains the company's healthy revenue growth.
| Q1 2022 Net Margin | Q1 2023 Net Margin |
|---|---|
| 5.3% | 5.4% |
Data Source: Elevance Health Q1 2023 earnings press release.
Elevance Health's non-GAAP (adjusted) diluted earnings per share (EPS) soared 15.5% year over year to $9.46 in the first quarter. Because total expenses grew at a slower rate (10.5%) than operating revenue, non-GAAP net margin edged 10 basis points higher to 5.4%. Those factors, in combination with a 2% reduction in Elevance Health's diluted share count, are why the health insurer's adjusted diluted EPS growth outpaced operating revenue growth during the quarter.
Thanks to its reputation as a leader in an industry with promising growth prospects, analysts anticipate that Elevance Health's adjusted diluted EPS will grow at a compound annual rate of 12.3% over the next five years. That's slightly better than the 12.1% annualized growth projection for the healthcare plans industry.
Image source: Getty Images.
Significant dividend growth could persist
Elevance Health's 1.3% dividend yield may not jump off the page to income investors. It's low even compared to the S&P 500 index's 1.7% yield. But the puniness of the dividend now is somewhat compensated for by the fact that the company has nearly quadrupled its quarterly payouts over the last 10 years to $1.48. And it looks like the company will be able to maintain that remarkable pace of dividend growth in the years ahead.
ELV Dividend data by YCharts.
That's because Elevance Health's dividend payout ratio is on course to come in at around 21% in 2023. This will allow the company to retain the funds needed to strengthen its balance sheet and expand its operations. That's why I believe it is more likely than not that Elevance Health can deliver at least five more years of annual dividend growth at a clip in the teens.
A wonderful business at a fair valuation
An examination of Elevance Health shows that it is a fundamentally strong business. This is what makes the recent sell-off a buying opportunity for dividend growth investors, in my opinion.
The stock's forward price-to-earnings ratio of 12.2 is a bit below the healthcare plans industry average ratio of 13.2. In other words, Elevance Health is arguably an above-average business trading at a below-average valuation.
Investors looking for a solid dividend stock can take comfort not only in Elevance's low payout ratio that implies solid room for future dividend growth, but also possibly capturing a high-than-usual dividend yield as the stock is most likely trading at a below average valuation.
