Dividend Investor Portfolio #1: Healthy Incomes
Dear Investor,
We are pleased to share that we have totally revamped our Dividend Newsletter, Dividend Investor – and you will now be getting even more value!
After months of discussion with our community members, we have incorporated your valuable feedback into a comprehensive, all-in-one Newsletter to help you increase your dividend returns.
Now, in addition to the carefully selected high-quality Dividend stock recommendation you receive every Monday, you will also get access to our carefully curated Model Dividend Portfolio, as well as market and dividend stocks news and updates – all in the same Newsletter.
We look forward to investing alongside you and hope you enjoy our newly minted Dividend Investor!
1
1
Market-Moving News: March 25, 2024
Markets closed with mixed results on Friday, losing traction at the end of the day. The S&P 500 (SPX) and the Dow Jones Industrial Average (DJIA) fell slightly for the day, pulled down by weakness in Nike and Lululemon. At the same time, the Nasdaq Composite (NDAQ) and Nasdaq 100 (NDX) both clocked in record highs, propped up by a continued rally with semiconductor stocks.
All major indexes were strongly up for the week, with the S&P 500 and the DJIA registering their largest weekly gain so far this year. Investors received a fresh dose of optimism from the Federal Reserve’s stated projection of three interest-rate cuts this year. Markets were also excited by a slate of groundbreaking news arriving from Nvidia’s (NVDA) annual GTC conference, with the AI chip leader clocking in an 11th straight week of gains.
This week will be a holiday-shortened one, with markets closed on March 29th for Good Friday. The highlight of the data-heavy week will be Friday’s release of the Core PCE (consumption expenditures ex. volatile food & energy items), the Fed’s preferred inflation measure, which can sway the central bank’s interest-rate policy.
1
1
This Week’s Quality Dividend Stock Idea
UnitedHealth (UNH) is a diversified multinational managed healthcare and insurance company. Incorporated in 1977 and publicly trading since 1984, UNH is the world’s second-largest healthcare company, and the 10th largest global firm by revenue.
1
Market Leadership
UNH operates through two main segments: UnitedHealthcare and Optum. The UnitedHealthcare segment, which is responsible for the largest portion of total revenue, offers employer and individual, Medicare and retirement, community and state, and global health insurance. The Optum segment operates the Optum Health, Optum Insight, and Optum Rx divisions. Optum Health provides care directly through local medical groups and ambulatory care systems. Optum Insight provides data, analytics, research, consulting, technology and managed services solutions to hospitals, physicians, health plans, governments and life sciences companies. Optum Rx offers a full spectrum of pharmacy care services.
UnitedHealthcare plays a key role in the U.S. healthcare system, insuring over 47 million people and ranking 1st or 2nd in most of its commercial, Medicare, and Medicaid end markets. At the same time, Optum is the third-largest pharmacy benefit manager in the nation. UNH is also the single-largest owner of non-hospital medical care systems, such as physician practices, urgent care centers, and ambulatory surgical centers. The vast size and vertical integration of the company’s businesses support its exceptionally wide economic moat, giving it the flexibility to raise premiums while simultaneously increasing membership.
1
Dividend Analysis
The stability and reliability of UNH’s businesses support its balanced capital strategy, based on the allocation of the capital generated by its strong cash flow among several key priorities: internal reinvestment, growth through acquisitions, and returning capital to shareholders through dividends and share repurchases.
UnitedHealth Group began paying annual dividends in 1990, moving to a quarterly dividend in June 2010. The company pursues an aggressive dividend growth policy, with the payout growing by a total of 620% in the past 20 years. The company’s Board has authorized a double-digit increase of the dividend each year since 2010. In the past decade, the dividend has grown at a CAGR of 21.4%; the latest payout hike of 14% was in June 2023.
1
UnitedHealth’s current dividend yield stands at 1.5%, in line with the Healthcare sector’s average. The company’s very low earnings-based payout ratio of 29.9% and cash payout ratio of 27.4% leave it with ample capital and cash to pursue business growth and support the outlook of ~10-15% annual dividend increases for years to come. With a history of constant, uninterrupted dividend increases spanning almost a quarter of a century, and ample cash generation backing these increases, UNH is one of the most reliable dividend payers and growers on the market.
In addition to dividends, the company consistently participates in stock buybacks, including over $8 billion in stock repurchases during 2023.
1
Total Return Outlook
The company’s stellar financial health and robust profitability allow it to significantly compensate its shareholders. UNH has a low net debt-to-equity ratio, and features capital efficiency metrics – return on capital, return on equity, and return on assets – which are much higher than average for its industry. UnitedHealth also performs better than its peers in the industry in terms of operating, FCF, and net profit margins.
In the past decade, UNH has grown its revenue at a CAGR of 12% and EPS at a CAGR of 16%. The company has surpassed analysts’ EPS estimates in all quarters for which these estimates were available. In 2023, UnitedHealth’s revenues grew by 14.6% year-over-year, operating cash flows grew by 11%, and EPS increased by 13%.
UNH stock has been under severe pressure this year, leading to a decline of over 9% year-to-date, as a result of the double whammy of a regulatory probe and a wide-scale cyberattack on its systems. The Department of Justice has opened another antitrust inquiry into the relationship between UNH’s different units (the previous one was rejected by a federal judge in 2022). More concerning for investors was a cyberattack on UNH’s revenue and payments management subsidiary, Change Healthcare, which processes about 50% of medical claims in the country. The data breach disrupted pharmacy services, payment platforms, and medical claims processes.
These developments certainly present strong short-term headwinds, strongly impacting investor sentiment regarding the UNH stock. However, they are expected to be temporary, as the company’s superior finances and vital position in the U.S. healthcare system should help it overcome the rough patch. Meanwhile, the stock’s downward correction provides investors with an attractive entry point. UNH is now trading far below the Healthcare sector’s average, and lower than its peers in the industry. Furthermore, based on projected cash flows, UnitedHealth trades about 50% below its fair value, placing it firmly within a value category.
TipRanks-scored top Wall Street analysts see an average upside of 22.3% for UNH stock over the next 12 months, rating it a “Strong Buy”.
1
Investing Takeaway
UnitedHealth is one of the most systemically important healthcare companies, wielding a large market share and leading positions in all of its end markets. Its prudent management, stellar finances, and operational excellence support its attractive shareholder compensation policy. Its reduced valuations suggest that UNH combines both value and income proposition, and therefore is well-suited to be a part of long-term income portfolios.
1
1
Dividend Investor Portfolio
1
Portfolio News
¤ Qualcomm (QCOM) has called off its planned acquisition of the Israeli technology company Autotalks due to delays in securing regulatory approvals.
¤ Kroger (KR) disclosed plans to divest its specialty pharmacy business to Elevance Health. The deal is expected to close in the second half of 2024.
¤ BlackRock (BLK) has increased its quarterly cash dividend by 2%, to $5.10 per share.
1
Recent Trades
None at the moment, although we are considering adding a stock to our portfolio. Stay tuned.
1
Portfolio Attributes
1
Current Portfolio
1
1
1
Click here for more stock market analysis from TipRanks Macro & Markets research analyst Yulia Vaiman
1
Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment, and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
