In the realm of investing, market capitalization is a good but not perfect way to gauge the success of a business. Sure, sometimes companies are overvalued. But a company's market value can at least give you an idea of how much perceived value it provides to society.
There are currently just six U.S. businesses that hold the distinction of being in the $1 trillion market cap club. But as corporations grow revenue and profits over time, plenty of other candidates could eventually join this group. With a market value of $468 billion, UnitedHealth Group (UNH 0.30%) could become one of them.
But can it achieve this feat in the next seven years? Let's look at the math required to pull it off and the fundamentals to discern an answer.
Here's the math
From its current valuation, UnitedHealth Group needs to grow its non-GAAP (adjusted) diluted earnings per share (EPS) by nearly 114% in the next seven years to ascend to the four-comma club. That would be an 11.5% compound annual growth rate. It's also worth noting that this assumes a roughly unchanged valuation multiple.
UnitedHealth Group is a juggernaut in a massive industry
So we have the baseline of what it will take to add an extra digit to UnitedHealth Group's valuation. Here is why I think it can be done.
The company serves 150 million-plus people each year via its UnitedHealthcare health insurance plans and Optum data and technology businesses. That's a massive underlying customer base. Because of the unrivaled size of its customer base, analysts expect UnitedHealth Group to generate $367.7 billion in total 2023 revenue.
With a bigger top line than many global economies and all other health insurers, you'd think the law of large numbers would be working against the company. But this is still a drop in the bucket compared to the roughly $2.2 trillion in annual revenue the global health insurance industry is projected to haul in for 2023.
Organic growth through higher medical membership and price hikes on its health insurance plans/services is just one lever the company could use to boost revenue and profits. The other is bolt-on acquisitions, which could help to further expand its already leading market share by the time the global health insurance market can reach nearly $3 trillion in 2030.
For these reasons, analysts believe UnitedHealth Group's adjusted diluted EPS will rise by 12.8% annually over the next five years. For context, that beats out the healthcare plan industry average annual earnings growth forecast of 11.7%.
Image source: Getty Images.
An amazing dividend grower
UnitedHealth Group's 1.5% dividend yield doesn't seem to be that spectacular considering it matches the 1.5% yield of the S&P 500 index. But digging deeper, savvy investors will find that the company's phenomenal dividend growth is what sets it apart. In just the last five years, the quarterly dividend per share has more than doubled to the current mark of $1.88.
UNH Dividend data by YCharts.
UnitedHealth Group also appears to have many more years of dividend growth left. Besides its double-digit annual adjusted diluted EPS growth potential, the dividend payout ratio is set to register at below 30% in 2023. That payout ratio is conservative enough to leave the company with the capital needed for growth projects, debt repayment, and further dividend hikes.
The valuation is defensible
Prospects of a jump in elective surgeries coming out of the COVID-19 pandemic led UnitedHealth Group's shares to slip 5% so far in 2023. This has pushed the stock's forward price-to-earnings (P/E) ratio down to 18.1, which isn't excessively valued compared to the healthcare plans industry average forward P/E ratio of 13.9.
This is what makes UnitedHealth Group intriguing for dividend growth investors. And even if the forward P/E ratio contracts a bit in the future, the company's growth profile looks high enough to attain that $1 trillion valuation by 2030.
