When you invest in industries that are positioned to capitalize on secular trends, owning wonderful businesses for the long haul is all it takes to build wealth and passive income. As the world's population increases in both age and number, growing demand for health insurance and medical devices is a given.
UnitedHealth Group (UNH 0.30%) and Medtronic (MDT 0.62%) are two businesses within the healthcare sector whose proverbial boats could be lifted by this rising tide. Here's why each stock looks like a buy currently.
1. UnitedHealth Group: Not to be outdone in size and scale
Working with employers, governments, and healthcare providers, UnitedHealth Group's reach is undeniable. The company serves 152 million people each year through its UnitedHealthcare health insurance plans and Optum technology and data businesses. This is why analysts expect that the company will haul in approximately $332 billion in revenue in 2023, making it the largest health insurer on the planet.
Given its unmatched size, you would think that UnitedHealth Group's days of strong growth are probably behind it. But this likely won't prove to be the case. The company's market share of the $1.8 trillion health insurance market has room to expand further with acquisitions. And as the global health insurance industry grows to $2.6 trillion by 2028, organic revenue can keep growing at a healthy pace.
This is why analysts believe that UnitedHealth Group's non-GAAP (adjusted) diluted earnings per share (EPS) will rise by 12.6% annually over the next five years. For context, this is better growth potential than the healthcare plans industry average annual earnings growth outlook of 11.6%.
Investors seeking respectable starting dividend income will be pleased to learn that UnitedHealth Group's 1.6% dividend yield (rounded down) is slightly more than the S&P 500 index's 1.6% yield (rounded up). And with the dividend payout ratio set to register at 32% in 2023, the real selling point is the double-digit annual dividend growth that lies ahead for shareholders. Finally, UnitedHealth Group's forward price-to-earnings (P/E) ratio of 16.5 isn't unreasonable compared to the healthcare plans industry average forward P/E ratio of 12.9.
Image source: Getty Images.
2. Medtronic: Committed to research and development
Since its founding in 1949, Medtronic has established itself as a trusted name and a leader within the medical devices space. The company's medical devices make a difference in the lives of over 70 million patients each year (or two patients every second) across 70-plus chronic health conditions, such as diabetes and heart diseases.
Medtronic's remarkable reach is the byproduct of both its dedication to research and development (R&D) to spur cutting-edge product development, and an innovative corporate culture. The company's $2.7 billion in R&D spending to fund 239 clinical trials in fiscal year 2023 amounted to nearly 9% of its $31.2 billion for the fiscal year. Along with the nearly 50,000 patents that the company already has stacked up within its portfolio, this should power revenue and earnings higher over time.
As shareholders wait for Medtronic to grow its sales and profits, they can collect an enticing 3.2% dividend yield. Better yet, with the dividend payout ratio poised to come in around 55% this fiscal year, the market-doubling dividend is also safe. Shares of Medtronic can be picked up at a forward P/E ratio of 15.8, which is well under the medical devices industry average forward P/E ratio of 27.2. That's what makes the stock such an intriguing pick for dividend growth investors.
