The Dow Jones Industrial Average has done quite well in the last 10 years at generating returns. A $10,000 investment in the benchmark would now be worth $26,000 with dividends reinvested.
But a few big winners are responsible for most of those returns. One of these stocks is UnitedHealth Group (UNH 1.25%). By turning a $10,000 investment into $90,000 in the past 10 years with dividends reinvested, the giant health insurer has played a huge role in the Dow's impressive performance.
Let's dive into three reasons why I am confident UnitedHealth will keep outperforming the Dow Jones.
1. UnitedHealth boasts enviable fundamentals
Several trends, such as an aging global population and the rise of inactive lifestyles, have been favorable for the health insurance industry for many years now. Serving more than 150 million customers each year through its UnitedHealthcare health insurance and Optum technology services businesses, UnitedHealth Group has been ideally positioned to cash in on these trends.
The health insurer's $448 billion market capitalization is four-fold greater than the $108 billion size of its next-biggest peer, Elevance Health (NYSE: ELV).Growing demand for health insurance plans coupled with price hikes led UnitedHealth's revenue to soar nearly 200% over 10 years to $324.2 billion in 2022. Improved profitability and share repurchases propelled diluted earnings per share (EPS) 300% higher to $21.18 over that same time frame.
And since the trends favorable to the global health insurance market are showing no sign of ending anytime soon, the global health insurance market is set to benefit further. Fortune Business Insights projects that the global health insurance industry will grow from $2.1 trillion in 2021 to surpass $3 trillion by 2028.
Analysts believe that the company's earnings could compound by 13% each year over the next five years. Putting this into perspective, that is superior to the healthcare plan industry's average growth forecast of 11.8%.
The rationale for this above-average growth potential arguably includes two variables. First, the company's size makes it more likely to win government contracts for its health plans. Second, UnitedHealth can also outpace industry growth through bolt-on acquisitions to further expand its reach.
Image source: Getty Images.
2. It has a rapidly growing payout
UnitedHealth Group's 1.4% dividend yield doesn't stand out to income investors in comparison to the 2% average dividend yield of the Dow Jones Industrial Average. But it would be a mistake to write off the stock just for this reason: The company's quarterly payout per share has climbed nearly 500% in the past 10 years to $1.65.
And with the dividend payout ratio poised to come in at around 29% for 2023, UnitedHealth Group could keep delivering firmly double-digit annual dividend growth for the foreseeable future. Such a modest payout ratio leaves the company with enough capital to improve its business via acquisitions and debt repayment.
3. The stock's valuation isn't excessive
UnitedHealth Group's forward price-to-earnings (P/E) ratio of 17.1 is considerably higher than the healthcare plan industry's average of 12.9. But UnitedHealth is a world-class business with exceptional growth prospects. That is why I believe the valuation premium to its peers can be justified, making the stock a buy for dividend growth investors.
