It's only July, but 2023 has already been a terrific year for most stocks. The benchmark S&P 500 index is up more than 17% since the end of 2022.
While this has been a great year for most of the stocks already in our portfolios, it's getting harder to find shares of reliable businesses to buy at reasonable valuations. The average stock in the Dow Jones Industrial Average is trading at nearly 23 times trailing earnings. A year ago, thayt figure was just 17.5 times trailing earnings.
It's harder to find reasonably priced businesses that can be relied on to pay rapidly growing dividends. Luckily, a stock market focused on short-term issues for these two health insurers is creating an opportunity to buy two exceptional dividend-paying stocks at prices that are more than fair.
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CVS Health: a 3.4% yield
Lower Medicare Advantage star ratings have kept shares of CVS Health (CVS -0.22%) stock under pressure all summer. Those ratings are a big deal because the Centers for Medicare and Medicaid Services (CMS) offers quality bonuses for plans with ratings of four stars or higher.
The CMS made it relatively easy to maintain higher ratings during the COVID-19 public health emergency. Now that the emergency has ended, the percentage of CVS Health's Medicare Advantage patients in plans rated 4.0 or better fell to 21% in 2023, down sharply from 87% a year earlier.
CVS Health expects the upcoming loss of bonus payments from CMS to lower the amount of operating income its Health Care Benefits segment generates by $800 million to $1 billion in 2024. The losses will sting, but they're hardly a reason to avoid the stock. The strongly profitable company reported $15.9 billion in operating income over the past 12 months.
CVS Health held its dividend payout in place from 2017 through 2022 to repay some of the debt it took on to acquire Aetna, its health insurance benefits management business. It's raised its dividend payout by 10% annually over the past two years, and it will probably continue with rapid raises despite a temporary loss of star rating bonuses. The company needed just 17% of the free cash flow its operation generated over the past year to meet its dividend commitment.
CVS Health will lose some bonus payments from the government this year, but those losses will probably be offset by contributions from its increasingly large value-based care operation. In March, the company acquired Signify Health, a network of more than 10,000 clinicians who perform millions of in-home health assessments annually.
Temporary disruptions to CMS bonus payments have driven CVS Health shares down to just 8.3 times forward-looking earnings estimates. That means long-term investors can realize market-beating gains even if earnings stagnate. Considering America's ever-increasing need for more healthcare services, another decade of strong growth seems far more likely.
UnitedHealth Group: a 1.6% yield
UnitedHealth Group (UNH 0.30%) is another health insurance benefits manager that has been beaten down thanks to temporary issues. Shares of the stock tumbled in June after management told investors that Medicare-eligible patients who had generally avoided care because of the pandemic are driving up utilization costs in 2023.
Despite the warning, UnitedHealth recently reported second-quarter earnings from operations that grew 13% year over year. The company even raised its earnings outlook. Now, management expects 2023 earnings to rise about 17% year over year at the midpoint of its guided range.
Like CVS Health, UnitedHealth Group manages outgoing medical expenses by employing heaps of healthcare providers. In February, it took another big step in this direction by acquiring LHC Group. This organization employs 30,000 people and provides more than 12 million in-home interventions annually.
UnitedHealth's dividend yield is low now, but it's rising so fast that this could become your top-income provider by the time you're ready to retire. The payout's risen a stunning 571% over the past decade, and more rapid raises are probably ahead. The company met its dividend commitment using just 18% of the free cash flow its operations generated over the past 12 months.
There are no guarantees that UnitedHealth Group can raise its payout sixfold again in the decade ahead. With no end to ever-increasing healthcare expenses in sight, though, it has a pretty good chance.
