For a dividend-growth investor, the path to lasting success is as simple as buying and holding businesses that are consistently growing. After all, steadily rising profits drive dividend growth over long periods of time.
There aren't many businesses that have delivered dividend growth as incredibly as the health insurer UnitedHealth Group (UNH 0.30%). The company's quarterly dividend per share has grown by a staggering 1,404% since switching from an annual dividend to its first quarterly dividend in June 2010.
Does UnitedHealth Group still belong in a dividend-growth stock portfolio? And if so, is the stock a buy at the current valuation? Let's dive in to get an answer.
Revenue and profits keep climbing higher
If the world of business is compared to mountaineering, UnitedHealth Group stands by itself atop the summit of the proverbial health insurance industry mountain. Analysts expect that the company will generate $364.5 billion in revenue for 2023. Putting this into perspective, that is more than twice the $166.7 billion in revenue that analysts expect from the next biggest player in 2023, Elevance Health.
In the second quarter this year, UnitedHealth Group's total revenue surged 15.6% higher over the year-ago period, to $92.9 billion. This remarkable top-line growth was fueled by growth in both total medical membership for UnitedHealthcare insurance plans and consumers served by its Optum Health technology and data business for one. In short, there's a dependably growing demand for its plans and services driven by favorable demographic trends. Along with the necessity of its plans and services, UnitedHealth Group could also raise its rates with minimal pushback.
The health insurance titan's non-GAAP (adjusted) diluted earnings per share (EPS) increased at a 10.2% year-over-year clip to $6.14 for Q2. However, profit growth lagged revenue growth due to a slightly faster growth in operating expenses as well as an increase in interest expenses, leading to a dip in the company's net margin.
As the company moves past the elective procedure-filled 2023, profitability should improve: Analysts believe UnitedHealth Group's adjusted diluted EPS should compound at 12.6% annually over the next five years. By comparison, that's greater than the health insurance industry average expected earnings growth of 11.6%.
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Impressive payout growth lies ahead
UnitedHealth Group's 1.6% dividend yield is marginally above the S&P 500 index's 1.5% yield. And if more starting income wasn't enough for investors, the company also appears positioned to extend its track record of above-average dividend growth.
UnitedHealth Group's dividend-payout ratio is set to come in at below 30% in 2023, which leaves it enough capital to expand the business and strengthen its balance sheet. That is why I would be surprised if the company didn't deliver annual dividend growth in the teens for at least the next five to 10 years.
The premium valuation can be justified
Despite its exceptionally bright future, shares of UnitedHealth Group have shed 9% of their value so far in 2023. This short-term underperformance could be a great chance for investors to pick up a world-class business at a sensible valuation.
UnitedHealth Group's forward price-to-earnings (P/E) ratio of 17.2 is meaningfully more than the health insurance industry average forward P/E ratio of 13.2. But for investors who are confident that the company can keep beating its competitors, UnitedHealth Group's premium valuation is well earned, and it can keep trouncing the broader market in the long run.
