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Should You Buy This Fast-Growing Dividend Stock?

One of the prevailing phrases in the investing community is: “Past performance is no guarantee of future results.” There certainly are few guarantees in life. However, investing in top-notch dividend growth stocks with proven business models is the closest thing to a guarantee of building generational wealth.

The health insurer UnitedHealth Group (NYSE: UNH) is a prime example of this. A mere $10,000 investment in the stock 10 years ago would now be worth over $117,000 with dividends reinvested, which is a blistering 28% annual total return rate. But can this dividend growth stock keep making shareholders richer over time, and should you buy it? Let’s dig deeper into UnitedHealth Group’s fundamentals and valuation to address these questions.

Another quarter of double-digit revenue and earnings growth

The largest health insurer in the world recently released its financial results for the second quarter ended June 30. And it certainly didn’t disappoint, beating the average analyst predictions for both revenue and non-GAAP (adjusted) diluted earnings per share (EPS) during the quarter.

UnitedHealth Group reported $80.3 billion in revenue in the second quarter, which is a 12.6% growth rate over the year-ago period. This narrowly surpassed the analyst revenue consensus of $79.7 billion for the quarter. How did the health insurer exceed analysts’ expectations for the ninth out of the past 10 quarters?

UnitedHealth Group’s total medical customer base grew by 3.3% year-over-year to 51.2 million in the second quarter. This was due to the company’s leadership in the health insurance industry and the promising industry outlook. And UnitedHealth Group’s Optum Health customers served increased by 2% over the year-ago period to 101 million for the second quarter. Along with premium hikes that were passed on to its customers, this explains how UnitedHealth Group was able to deliver double-digit revenue growth in the quarter.

The company recorded $5.57 in adjusted diluted EPS for the second quarter, which was an 18.5% year-over-year growth rate. This easily outperformed the analyst earnings consensus of $5.24 for the period. And it was the 10th out of the last 10 quarters that UnitedHealth Group was able to do so.

Due to a more favorable business mix (i.e., fewer COVID-19 claims) and a higher revenue base, the company’s net margin edged 30 basis points higher to 6.3% during the second quarter. Paired with a 0.6% reduction in UnitedHealth Group’s weighted-average outstanding share count to 950 million, this is how the company’s earnings grew at a faster rate than revenue.

And thanks to the growing demand for health insurance, analysts believe that the growth forecast will remain encouraging for the company. In fact, UnitedHealth Group’s annual earnings growth will remain firmly in the double digits over the next five years at 14.4%.

Image source: Getty Images.

High dividend growth is poised to persist

UnitedHealth Group’s 1.2% dividend yield is below the S&P 500 index’s 1.6% yield. But what the company lacks in dividend yield, it makes up for with its dividend safety and strong growth potential.

UnitedHealth Group’s dividend payout ratio is projected to be 29.4% in 2022. This gives the company plenty of retained capital to continue repurchasing shares, paying down debt, and executing bolt-on acquisitions to boost its adjusted diluted EPS year after year. And the company should have no problem announcing many more double-digit percentage dividend increases like its most recent 13.8% hike in June.

World-class quality rarely comes cheap

UnitedHealth Group is arguably the most dominant health insurer on the planet. And this fact hasn’t been lost on the market. UnitedHealth Group trades at a forward price-to-earnings (P/E) ratio of 21.4, which is significantly higher than the healthcare plan industry’s average forward P/E ratio of 16.2.

But the analyst projection of 14.4% annual earnings growth is moderately higher than the industry average of 12.6% annual earnings growth. Simply put, UnitedHealth Group’s current roughly $530 share price is a reasonable entry point for investors looking to generate double-digit annual total returns for the foreseeable future.

Kody Kester has positions in UnitedHealth Group. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.

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