Most investors probably know what UnitedHealth Group (UNH 0.30%) is. It's the world's largest healthcare company, a member of the Dow Jones Industrial Average, and has its hands in various areas, from insurance to care.
Its rise to healthcare prominence has been remarkably profitable for investors over the years; the stock has returned more than 338,000% over its lifetime. Today, the company carries a $452 billion market cap, and this massive size means that its best total-return years are probably behind it.
However, the table could be set for remarkable dividend growth as the company distributes profits to shareholders over the coming years. Here is what investors who buy the stock today might expect moving forward.
A solid starting dividend with room to run
UnitedHealth isn't a stranger to paying dividends; the company's already paid and raised its dividends for 14 consecutive years. That does two things for shareholders: It shows that management is committed to growing the dividend and offers a solid starting dividend yield of about 1.5% today.
The dividend has grown quickly, averaging more than 25% annually over the past decade. Even more impressive, it still has strong momentum. The dividend's average increase is roughly the same over the past three years. In other words, it's consistently growing at this robust rate.
UNH Dividend data by YCharts
But it gets better; the company's dividend payout ratio has fallen under 20% despite the aggressive increases. It's one thing for a company to aggressively grow its dividend because it has the financial room to do it. It's another when investors get these massive raises, and it doesn't increase the payout ratio.
A strong outlook means a growing dividend
UnitedHealth is a massive business today, but that doesn't mean the fun is over. Analysts believe the company will grow earnings at a low-double-digit pace moving forward. According to the Centers for Medicare & Medicaid Services, total U.S. healthcare spending could increase by more than 5% annually through 2030, growing to nearly $7 trillion in annual expenditures.
UNH EPS LT Growth Estimates data by YCharts
While UnitedHealth is already a huge company doing more than $348 billion in annual revenue, that is still a massive market to grow into from here. UnitedHealth's large size is a competitive advantage because it can provide better products and services for less money. Double-digit earnings growth should fuel rapid dividend growth at the very least.
Consider that UnitedHealth's dividend has roughly quadrupled over the past decade. Yet, it still has a sub-20% payout ratio. As a result, long-term investors could see their passive income continue multiplying over the next decade and beyond.
Shares look enticing, but keep this risk in mind
Using estimated 2023 earnings per share (EPS), UnitedHealth shares trade at a price-to-earnings ratio (P/E) of 20. Considering the company's expected 12% earnings growth moving forward, that's a reasonable price/earnings-to-growth (PEG) ratio of 1.6. Every investor loves a bargain, but you can do well simply by buying an excellent stock like UnitedHealth at a fair valuation and holding for the long term. Fortunately, this stock looks pretty reasonable today.
However, no investment is risk-free, so there is some fine print to consider. UnitedHealth relies on the U.S. healthcare system for its business. There have been occasional political campaigns to nationalize healthcare for Americans, which could be catastrophic for UnitedHealth. I'm only briefly touching on this because it doesn't seem like there's much current momentum in Washington, D.C., to revisit this topic, but investors should always have this in the back of their minds when looking at healthcare stocks.
UnitedHealth is a proven winner with a massive runway to become one of the market's best dividend growth stocks over the coming years. Don't avoid the stock if you're looking for passive income streams that can outrun inflation for years.
