A good measure of a truly great business is that it outperforms the broader market over the long haul. This is because over the long term total returns tend to be more closely aligned with fundamentals rather than market sentiment.
UnitedHealth Group (UNH 0.30%) is undoubtedly an impressive company, and would have parlayed a $5,000 investment made 10 years ago into $41,000 today with dividends reinvested. For context, that is far more than the $16,000 that the same investment amount in the S&P 500 index would now be worth.
Here are three reasons why I believe UnitedHealth is positioned for further outperformance moving forward.
1. A giant in a flourishing industry
Reaching over 150 million people each year via its UnitedHealthcare health insurance plans and Optum health services, UnitedHealth Group sits atop the throne of the healthcare plans industry. For an idea of its colossal size, the company's $437 billion market capitalization is $52 billion more than those of the next six biggest healthcare plan companies put together.
Alongside growth catalysts such as global population growth and increasing adoption rates of health insurance plans, UnitedHealth Group's industry leadership has produced remarkable results in recent years. The company's revenue has rocketed higher by almost 200% from 2012 to 2022, while its diluted earnings per share (EPS) climbed by 300% during that time.
UnitedHealth also appears to be far from finished delivering such results. This is because the same tailwinds that have generated outsized growth in years past look to be intact. It is forecast that the global population will compound from around 8 billion in 2022 to surpass 10 billion by 2060. That is largely why Vantage Market Research believes the global health insurance market will grow from $2.6 trillion in 2021 revenue to $3.3 trillion in revenue by 2028.
Taking these factors into consideration, it shouldn't be a shock to learn that analysts anticipate that UnitedHealth's diluted EPS will rise by 12.6% annually for the next five years. By comparison, this growth profile is better than the healthcare plans industry average annual earnings growth prediction of 11.6%. Reasons for the company's strong growth potential include both its size, which earns favor for government-sponsored health plan contracts, and its use of acquisitions to strengthen its competitive position.
Image source: Getty Images.
2. High dividend growth could persist
UnitedHealth is arguably a company that can offer investors the best of both worlds: income and growth. For investors seeking income, the stock's 1.6% dividend yield is in line with the S&P 500 index's 1.6% yield. For growth-oriented investors, UnitedHealth's quarterly dividend per share has shot up by almost 600% over the last 10 years to the current rate of $1.88.
UNH Dividend data by YCharts
Investors can also be quite confident that the company's days of considerable dividend growth won't be ending in the foreseeable future either. This is because UnitedHealth's dividend payout ratio is poised to clock in at approximately 28% in 2023, which is low enough to balance future business growth with payout growth.
3. The valuation remains within reason
Near-term concerns about a spike in elective surgeries among older adults due to the deferral of surgeries during the COVID-19 pandemic has weighed on UnitedHealth Group's stock as of late: Shares of the health insurer have dipped 12% so far in 2023. But this could be more of a buying opportunity than cause for concern.
That's because UnitedHealth's forward price-to-earnings (P/E) ratio has declined to just 16.8. While still significantly above the healthcare plans industry average forward P/E ratio of 13.1, this is a fair valuation for a leading company with a tremendous growth outlook. In my opinion, this makes UnitedHealth a buy at the current $468 share price.
