Since no two investors have the same plans and levels of risk tolerance, no two investment portfolios will be identical to each other. Although the goal for all investors is to build enough wealth to fund their ideal lifestyle, one key way to do that is by leveraging what goes into your portfolio.
Elevance Health (ELV -0.45%), formerly known as Anthem, has been a tremendous compounder in recent years: A $10,000 investment in the stock made five years ago would now be valued at $20,000 with dividends reinvested. For context, that's better than the $18,000 that the same investment amount in the S&P 500 index would now be worth. Let's look at three reasons why Elevance Health remains a buy for investors seeking to grow both their wealth and dividend income.
1. Secular tailwinds are powering strong business growth
Out of all industries across the global economy, the prospects of the health insurance industry could be one of the most promising. After all, the rise in chronic diseases (e.g., heart disease and cancer) that accompany a growing global geriatric population are driving higher demand for health insurance plans. This is precisely why market research company Fortune Business Insights thinks that the global health insurance market will increase from $2 trillion in 2020 to top $3 trillion in 2028.
Serving nearly 120 million people through its Anthem health plans business and Carelon healthcare services business, few companies are benefiting from this robust industry growth outlook as much as Elevance Health. The Indianapolis, Indiana-headquartered company's operating revenue grew by 12.7% year over year to $43.4 billion for the second quarter ended June 30.
| Metric | Q2 2022 | Q2 2023 |
|---|---|---|
| Medical Membership (in millions) | 47.1 | 48 |
| Net Margin | 5% | 4.9% |
Data source: Elevance Health.
Demographic trends helped the company to add 938,000 members to its medical membership base over the prior year. Medical membership growth is important because it is one lever the health insurer has to grow its revenue. Coupled with price bumps that were passed onto its health plan members, this explains the healthy topline growth rate during the quarter.
Elevance Health's non-GAAP (adjusted) diluted earnings per share (EPS) surged 13.4% higher over the year-ago period to $9.04 in the second quarter. Faster growth in the company's total expenses than operating revenue led to a contraction in its non-GAAP net margin. Seeing as other health insurers are facing an increase in expenses stemming from elevated medical claims, this isn't too worrying, in my opinion. The company's decline in profitability was more than offset by a 2.3% reduction in its outstanding diluted share count due to share repurchases. That is how adjusted diluted EPS growth outpaced operating revenue growth for the quarter.
Looking forward, the company is poised to deliver similar growth: As Elevance Health grows both organically and through bolt-on acquisitions, analysts believe its adjusted diluted EPS will compound by 12.3% annually over the next five years. By comparison, this is greater than the healthcare plans industry average annual earnings growth outlook of 11.5%.
Image source: Getty Images.
2. A payout with a long-term growth runway
Considering that its 1.3% dividend yield is below the S&P 500 index's 1.5% yield, Elevance Health probably doesn't catch the eyes of most dividend investors. But the company makes up for this low starting yield in more ways than one. For starters, Elevance Health's most recent 15.6% boost to its quarterly dividend per share was quite generous.
It also doesn't hurt that similar dividend growth can probably continue for the foreseeable future. This is because Elevance Health's dividend payout ratio is positioned to register at approximately 18% in 2023. This should give the company the necessary capital to invest in growth and reduce its debt load while also rewarding shareholders with dividend hikes.
3. The stock is priced at an enticing valuation
The fundamentals of Elevance Health paint a picture of a thriving company. Yet, the stock's valuation isn't excessive, either. Elevance Health's forward price-to-earnings (P/E) ratio of 12.6 is less than the healthcare plans industry average forward P/E ratio of 13.8. For whatever reason, the jump in elective surgeries that have hit other players in the healthcare plans industry has hit Elevance Health harder. But a combination of above-average growth potential and a below-average valuation should bode well for the company's shareholders over the long haul, which is why I think it's currently a buy.
