UnitedHealth Group (UNH 0.30%) is one of the largest healthcare companies in the world. It's already a top health insurer in the U.S., but that doesn't mean the company isn't working to be even bigger. Those efforts firmly place this company as a top growth stock.
Over the past decade, share prices of UnitedHealth Group have risen by 600%. The big questions for investors going forward, however, are how much bigger can the business get and whether its stock is still a good buy.
Here's a look at what this healthcare giant might do over the next five years.
Investors should expect more acquisitions
UnitedHealth is always on the hunt for acquisition deals, and that's not a trend that I would expect to stop. It closed on its $5.4 billion purchase of home health company LHC Group earlier this year, and its $13 billion purchase of Change Healthcare also went through a year ago.
There are likely to be more deals on the horizon because UnitedHealth is focused on growth. The company's long-term target is between 13% and 16% in annual profit growth.
While it's possible that an aging population and a rising need for healthcare will lead to a natural increase in spending and an uptick in revenue for UnitedHealth, that alone might not be enough to get the company growing well into double digits. Acquisitions are likely going to play a key part in the business growing its bottom line.
The company is also in a strong enough position, thanks to its impressive free cash flow, that it will be able to pursue opportunities as they come up. Over the trailing 12 months, UnitedHealth's free cash has totaled $38.2 billion, and that has been trending upward for years.
UNH free cash flow data by YCharts.
UnitedHealth is likely to use AI more extensively
Artificial intelligence (AI) has an important role in the growth of many businesses by changing the way they operate and making many processes easier and more automated. I would expect UnitedHealth to focus on this as well.
The company now has a data analytics company with Change Healthcare, and it can play a big part in using AI to provide value for UnitedHealth Group and its customers. Its goal is to reduce costs and improve outcomes for patients, and AI can help with both tasks.
AI isn't new to UnitedHealth, which has been using chips from Nvidia to help develop deep-learning models to automate processes. But with AI becoming more prevalent and Change Healthcare now part of its business, investors should expect to see more AI-driven developments from UnitedHealth over the next five years. And as it incorporates more automation and machine learning, that should reduce costs and improve earnings.
The dividend should get bigger
Many investors buy shares of UnitedHealth Group for its growing dividend. The yield today is modest at 1.4%, but the company has been increasing its payouts over the years. And it wouldn't be surprising to see that pattern continue, especially given how much free cash flow the business generates and given its focus on strengthening its bottom line.
UnitedHealth has a very modest dividend payout ratio of around 30%, which leaves plenty of room for increases in the future. Over the past five years, the healthcare company has more than doubled its quarterly per-share dividend from $0.90 to $1.88, for a compound annual growth rate of 15.9%. Although that's a high rate, it might be able to keep it up given its low payout ratio and continued earnings growth. Whatever the rate, it's probable that UnitedHealth's dividend will become much bigger in five years.
Should you buy UnitedHealth stock today?
This year, UnitedHealth Group hasn't made for a hot buy. Its share prices are down 3% so far in 2023 as investors focus more on tech stocks and companies more obviously involved with AI. But that could be a mistake; it has some strong fundamentals, a growing business, and a dividend that's likely to increase.
All in all, this is a great stock to hang on to for years. And at a price-to-earnings multiple of 23, it's not terribly expensive -- the average healthcare stock trades at a multiple of nearly 26.
