Dividend Investor Portfolio #30: Health in Wealth
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Dear Investor,
Welcome to the 30th edition of TipRanks’ Dividend Investor Portfolio & Newsletter.
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Market-Moving News: October 14, 2024
Major stock indexes climbed for the fifth week in a row, pushing higher on the bull market’s two-year birthday. The S&P 500 (SPX) and the Dow Jones Industrial Average (DJIA) rose by 1.11% and 1.21% on the week, respectively, reaching new records. Meanwhile, the Nasdaq Composite (NDAQ) and the Nasdaq-100 (NDX) added 1.13% and 1.18%, ending the week less than 2% below their historic peaks.
Economic data was in the spotlight throughout the choppy week, with the Fed member speeches and the release of the September Federal Open Market Committee (FOMC) meeting minutes also drawing significant investor attention.
The week started on the wrong foot for stocks as the odds of another jumbo interest-rate cut faded following the previous week’s stronger-than-expected jobs data, underscoring the resilience of the U.S. economy. Although the economy’s strength boosted optimism for a soft landing, it raised worries that policymakers may slow or even pause their rate-easing pace. Thursday’s slightly hotter-than-expected CPI, which came along with a rise in jobless claims, added to investor confusion about the economy’s health, muddying the outlook for monetary policy.
Friday’s tepid producer-price inflation data, serving as a leading indicator for consumer inflation, rekindled optimism that the Federal Reserve is on the right path. In addition, the FOMC minutes revealed that most of the rate committee members supported the 0.5% rate reduction, agreeing that inflation risks have diminished while risks to the job market health have become elevated. Markets are now pricing in a 0.25% interest rate cut in November.
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This Week’s Quality Dividend Stock Idea
The Cigna Group (CI), which together with its subsidiaries, provides a broad range of insurance and related services within the United States, as well as global insurance and health services.
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Our Medical History
Cigna was founded over 230 years ago in 1792 as the Insurance Company of North America (INA). Over the years, the company has made significant changes in its focus, with a particular emphasis on healthcare insurance following World War II. After merging with the Connecticut General Life Insurance Company in 1982, INA became known as the Cigna Corporation. The company underwent another name change in February 2023, becoming Cigna Group.
From the 1990s onward, Cigna refocused its business on healthcare by expanding its business through joint ventures and acquisitions and developing innovative online tools. The company divested its non-core businesses such as life insurance, annuity, retirement, and others. Cigna was among the first U.S. healthcare providers to digitalize, launching the world’s first online physician-led healthcare network for doctors serving expatriates. The company also introduced a personalized web portal for clients as early as 2002.
Since the 2000s, the group also continued to grow in global markets, capitalizing on its growing digital prowess as well as strategic ventures and acquisitions in local markets. For example, Cigna became the first U.S. insurer to offer web-based expert second opinion services for expatriates. In 2022, Cigna celebrated 30 years of operations in Korea and Hong Kong, demonstrating long-term success in these markets. As of 2024, Cigna maintains sales capabilities in over 30 countries and jurisdictions, serving about 190 million customers globally.
With a market capitalization of $98 billion and annual revenues of $195 billion, Cigna is the fifth-largest health insurance company in the U.S. and has the fourth-largest market share (10%) among national health insurers. It ranks 16th on the Fortune 500 list of the largest U.S. companies by revenue.
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Focusing on Profitable Growth
The company operates through two main divisions: the health benefits provider Cigna Healthcare and the pharmacy, care, and benefits solutions provider Evernorth Health Services.
The Evernorth Health Services segment, responsible for ~60% of Cigna’s total revenues, is a full-service pharmacy platform. It offers a range of coordinated and point solution health services, including pharmacy benefits, home delivery pharmacy, specialty pharmacy, distribution, and care delivery and management solutions to health plans, employers, government organizations, and health care providers. Evernorth adds size and scale to the Cigna Group, in addition to differentiated capabilities and unregulated cash flows of notable proportions.
The company’s health insurance arm, Cigna Healthcare, is responsible for about 40% of the group’s total annual revenues. It provides commercial medical plans, individual health insurance plans, and specialty benefits and solutions, as well as Medicare Advantage, Medicare Supplement, and Medicare Part D plans. In addition, the segment oversees the International Markets division, which provides healthcare coverage abroad, as well as healthcare benefits for globally mobile individuals and employees of multinational organizations.
Cigna entered the Medicare business in 2011 with the acquisition of HealthSpring, and since then reached the rank of the seventh-largest Medicare plan provider in the U.S. However, Cigna realized that the low-growth, low-margin federal health insurance business no longer aligns with its ambitious growth plans. As a result, in January 2024, the company outlined its plan to divest from its Medicare businesses, selling them to Health Care Service Corporation (HCSC). The HCSC deal is expected to close in the first quarter of 2025, subject to regulatory approvals, and will allow Cigna to allocate resources toward growth opportunities in Evernorth Health Services and Cigna Healthcare portfolios.
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Healthy Health Provider
Cigna is a financially healthy company. Despite a medium-high net debt-to-equity ratio of 59%, Cigna’s debt is adequately covered by its operating cash flow, while the interest is covered by EBIT many times over. The company’s robust health and low financial risk are reflected in its high credit ratings: “A-” at Standard and Poor’s, “Baa1” at Moody’s, and “BBB+” at Fitch.
Cigna carries solid capital efficiency and profitability ratios, with ROE, ROA, and ROIC above the industry averages. Notably, Cigna took a massive $1.8 billion impairment loss in Q1 2024, which significantly impacted net income and thus depressed profitability ratios, which are expected to improve going forward. As for margin, Cigna’s gross, EBITDA, operating, and net profit margins compare well with its peers in the industry, with its FCF margin considerably above the average industry level. The exit of the Medicare business and the reallocation of resources to higher-growth, higher-margin Evernorth division are expected to help margin expansion in the next several years.
Cigna Group’s revenues surged from $35 billion in 2014 to over $195 billion in 2024 as the company embarked on significant growth initiatives over the past decade. These included large acquisitions and heavy investments in internal development. Despite the heavy outlays on growth, the company’s annual net income more than doubled over this timeframe.
The company has maintained mid-to-high single-digit revenue growth rates in recent years, supported by its strategic focus on both health services and pharmacy benefits. Cigna Group’s outlook for 2024 includes a projected EPS growth of 10-14% annually over the long term. Given CI’s track record of 14 straight quarters of surpassing analysts’ EPS estimates, this outlook may prove to be too conservative. Additionally, new strategic initiatives, such as behavioral health programs and biosimilar launches, are expected to drive further revenue and profitability improvements.
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Dividend Growth Champion
The Cigna Group has been paying small annual dividends since 1983, though prior to 2021 it didn’t have a structured dividend policy in place. That changed in January 2021, when Cigna announced that its Board of Directors had instituted a quarterly cash dividend as a reflection of its confidence in its ongoing ability to drive growth, and as a part of a balanced capital deployment strategy to maximize shareholder value.
Cigna has continued this dividend policy, increasing its dividend annually since 2021. The company has now increased its dividends for four consecutive years, with the payout growing at a staggering CAGR of 161%. Although its current dividend yield of 1.6% isn’t particularly high and only slightly exceeds the average for the Healthcare sector, Cigna’s strong cash generation and solid finances, coupled with its modest payout ratios, allow for an outlook for further fast dividend growth.
Analysts expect the company to continue delivering 10-15% annual dividend raises for the foreseeable future. In fact, in February 2024, Cigna’s Board of Directors declared a 14% increase in the quarterly dividend to $1.40 per share, demonstrating an ongoing commitment to its dividend policy.
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Total Return in Focus
In addition to dividends, CI compensates its shareholders through opportunistic buybacks, which at times can be very aggressive. In the half-decade through the end of 2023, the company decreased its share count by 22%. During 2023 alone, Cigna repurchased about $5 billion worth of its common stock, with additional buybacks continuing into early 2024 through accelerated repurchase agreements.
In December 2023, the company’s Board approved an aggregate increase of $10 billion in incremental share repurchase authorization, bringing the company’s total share repurchase authority to $11.3 billion. The company said it intends to use the majority of its discretionary cash flow for share repurchases in 2024.
Cigna’s stock has risen by about 15% in the past 12 months, significantly underperforming the S&P 500 as a part of the Healthcare sector, which lagged behind the broader markets over that period. However, CI has strongly outperformed all of its comparable peers, including the largest U.S. health insurer UnitedHealth. Top Wall Street analysts rate Cigna a “Strong Buy,” forecasting an upside of over 15% for the next 12 months.
CI is very attractively valued, with its current and forward PE ratios carrying significant discounts to the Healthcare sector averages. Compared to peers in the industry, CI comes towards the top of the price scale. This is understandable, as Cigna’s dividends, profitability, growth, and other metrics surpass those of most of its competitors. However, taking into account future cash flows, Cigna looks strikingly undervalued (by about 75%).
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Investing Takeaway
The Cigna Group is a global healthcare leader offering diverse services and driving growth through high-margin pharmacy and health solutions. Recent strategic moves signal a focus on more profitable segments. Cigna maintains strong financial health, reflected in consistent cash flows, an aggressive share buyback strategy, and dividend payouts that have been growing at breakneck speed. Cigna’s strong financial health, consistent cash flows, prudent capital allocation, and low payout ratios provide ample room for further fast-paced dividend growth. With a solid market position, projected robust earnings growth, and stated strong alignment with shareholder interests, Cigna presents an attractive opportunity for long-term income investors.
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Dividend Investor Portfolio
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Portfolio News
¤ The Ex-Dividend date for EOG Resources (EOG) is October 17th. The dividend payment date is October 31st.
¤ JPMorgan Chase & Co. (JPM) opened the Q4 2024 earnings season for U.S. companies last Friday. The world’s largest bank announced revenues and EPS that were well ahead of analyst estimates. Moreover, JPM’s reported net interest income (NII) rose by 3% year-over-year beating expectations for a slight decline. In addition, the bank provided favorable commentary on business trends and the economy’s overall health and raised its full-year 2024 NII guidance. its full-year 2024 NII guidance.
¤ BlackRock (BLK) also released its quarterly results last Friday. The world’s largest asset manager reported larger-than-anticipated increases in YoY revenue and EPS. Additionally, BLK’s assets under management (AUM) rose to $11.5 trillion, and net client inflows during the quarter reached $221 billion, both all-time highs.
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Recent Trades
None at the moment, although we are constantly evaluating stocks for a possible addition to the portfolio. Stay tuned.
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Portfolio Attributes
| Dividend Portfolio Yield |
Expected Dividend Growth | Expected Annual Income |
| 3.94% | +9.56% | $4,606.96 |
| Yield-on-Cost Adjusted, Weighted |
Average Analyst 12-Month Growth Outlook | 10K Per Stock at the Time of Purchase |
Current Portfolio
| Name | EX-Dividend Date | Payment Date | Yield on Cost | Annual DPS |
| Automatic Data Processing (ADP) | Dec 06, 2024 | Jan 01, 2025 | 2.24% | $5.60 |
| Allianz SE ADR (ALIZY) | May 09, 2025 | May 28, 2025 | 5.67% | $1.49 |
| Amgen (AMGN) | Nov 15, 2024 | Dec 06, 2024 | 3.09% | $9.00 |
| BlackRock (BLK) | Dec 08, 2024 | Dec 23, 2024 | 2.56% | $20.40 |
| Edison International (EIX) | Sep 27, 2024 | Oct 31, 2024 | 4.82% | $3.12 |
| EOG Resources (EOG) | Oct 17, 2024 | Oct 31, 2024 | 3.95% | $3.64 |
| JPMorgan Chase (JPM) | Oct 05, 2024 | Oct 31, 2024 | 2.86% | $5.00 |
| Kroger (KR) | Nov 15, 2024 | Dec 01, 2024 | 2.82% | $1.28 |
| LyondellBasell (LYB) | Nov 24, 2024 | Dec 04, 2024 | 5.27% | $5.36 |
| Philip Morris (PM) | Dec 20, 2024 | Jan 10, 2025 | 6.06% | $5.40 |
| Qualcomm (QCOM) | Nov 29, 2024 | Dec 13, 2024 | 2.25% | $3.40 |
| VICI Properties (VICI) | Dec 20, 2024 | Jan 04, 2025 | 5.19% | $1.72 |
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Click here for more stock market analysis from TipRanks Macro & Markets research analyst Yulia Vaiman
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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.
