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UnitedHealth: High-Quality Dividend Growth Stock

UnitedHealth: High-Quality Dividend Growth Stock
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By Wednesday, 30 September 2020 07:02 PM Current | Bio | Archive

Investors looking for quality dividend stocks should not focus solely on the current dividend yield. While many stocks have high yields of 8%-10% or even more in certain cases, these extreme high-yielders are often a sign of trouble. The abnormally high yield could be an indicator of an upcoming dividend cut or worse.

Therefore, investors should focus on quality, meaning a sustainable dividend payout with room for future growth. Investors should not overlook stocks that may have lower current yields, because these stocks could generate higher dividend growth.

One example is UnitedHealth (UNH), which has a relatively low yield of 1.6%. But the trade-off is that UnitedHealth rewards shareholders with high dividend growth from year to year. This is why UnitedHealth is a favorite holding among many institutional investor groups, such as hedge funds like Lone Pine Capital. UnitedHealth is likely to continue growing its dividend at a high rate for many years.

Business Overview and Recent Events

UnitedHealth offers global healthcare services to tens of millions of people via a wide array of products. The company has two major reporting segments: UnitedHealth and Optum. The former provides global healthcare benefits to individuals, employers and Medicare/Medicaid beneficiaries. The Optum segment is a services business that seeks to lower healthcare costs and optimize outcomes for its customers. UnitedHealth has a market capitalization of $289 billion, while the company generates annual revenue above $250 billion.

UnitedHealth continues to perform well on a fundamental basis, as the company has maintained steady growth even in a difficult environment for the broader economy. In the 2020 second quarter, revenue increased 2.5% to $62.1 billion, with premiums revenue rising 4.7%. The Optum business was up very strongly, growing 16.6% to $32.7 billion year-over-year. The medical care ratio fell to 70.2% from 83.1% last year as customers temporarily deferred care due to the pandemic. We expect this to begin to unwind and normalize in Q3 and Q4.

Meanwhile, UnitedHealth’s adjusted earnings-per-share nearly doubled to $7.12 in the second quarter, and cash flow from operations rose 42% to $12.9 billion. The company reiterated its guidance of $16.25 to $16.55 in adjusted earnings-per-share for this year, implying 2020 will be another successful year.

Attractive Dividend Growth Profile

With strong growth even in a difficult business climate, UnitedHealth is poised to continue increasing its dividend for many years, as it has done in the past. On June 2nd, UnitedHealth raised its dividend by 15.7%, a very healthy increase, particularly in the midst of the coronavirus pandemic which has ravaged the U.S. economy. UnitedHealth has increased its dividend for 10 consecutive years, and with an estimated 2020 dividend payout ratio of 31%, there is plenty of room for continued dividend growth.

UnitedHealth could conceivably increase its dividend by 10% per year, without moving its dividend payout ratio much at all. This is because the company continues to increase its earnings-per-share at an impressive rate. And, even though UnitedHealth stock has an unimpressive current yield of 1.6%, investors could see their dividend income grow rapidly over the years.

For example, if UnitedHealth increases its dividend by 10% per year, its yield on cost would rise to over 4% in 10 years. If investors were to reinvest their dividends over the 10-year forecast period, the yield on cost would be even greater. This means for investors buying the stock today, in 10 years they would be receiving over 4% of their investment in annual dividends.

The previous exercise shows the power of compounding dividend growth. It also indicates that investors should be willing to consider stocks even if they have lower current yields, if they offer high dividend growth. While UnitedHealth does not have a high current yield, the stock is an attractive investment for long-term dividend growth investors.

Bob Ciura has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.

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Investors looking for quality dividend stocks should not focus solely on the current dividend yield. While many stocks have high yields of 8%-10% or even more in certain cases, these extreme high-yielders are often a sign of trouble.
unitedhealth, high quality, dividend, growth stock
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2020-02-30
Wednesday, 30 September 2020 07:02 PM
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