4 reasons to buy this blue chip stock

It is important for investors focused on dividend growth to strike a balance between immediate income and future income.

While high-yield, dividend-paying, quality stocks can provide income to supplement a retired investor, they can’t always keep up with inflation. Indeed, yield and growth are generally inversely correlated. All things being equal, a low yield translates to higher dividend growth potential, while a high yield generally means lower dividend growth.

A stock that falls into the first category is the health insurer Anthem (ANTM 1.17% ). Let’s look at four reasons why the stock is a buy for dividend investors looking to boost the growth profile of their portfolios.

1. Business continues to grow by double digits

Anthem reported impressive results for the period ended December 31, 2021. Operating revenue totaled $136.9 billion during the year, which equates to a growth rate of 13.4% over to the previous year. What explains the healthy growth of the health insurer? The answer is twofold.

First, Anthem’s medical enrollments edged up 5.7% year-over-year to 45.4 million at the end of 2021. This was primarily driven by an increase in its Medicaid and Medicare businesses. Advantage. The rest of the enrollment growth was the result of companies enrolling employees in its business plans.

The second reason is the company’s pricing power given the need for health insurance. And with inflation accelerating, Anthem was able to pass on price increases to its membership base.

Anthem’s non-GAAP diluted earnings per share jumped 15.6% year-over-year in 2021 to $25.98. So how did the company achieve such solid earnings growth for a large-cap health insurer?

Besides Anthem’s higher operating revenue base, there was a contributing factor. Thanks to its share buyback program, the stock’s diluted weighted average number of shares decreased by 2.9% year-on-year to 246.8 million in 2021.

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2. A big fish in a growing pond

Anthem’s 2021 has been a phenomenal year. But analysts’ earnings growth forecasts for the next five years are particularly encouraging. Analysts expect the stock to post 12.9% annual earnings growth, which is almost in line with the growth recorded in 2021. What is the reasoning behind this optimistic outlook for the health insurer?

Due to rising costs of medical care and increasing rates of chronic diseases, the global health insurance market is likely to continue to grow for the foreseeable future. That’s why analysts predict that the global health insurance market will grow at an annual rate of 4.6%, from $2.8 trillion in 2020 to $3.9 trillion by 2027.

Being the third largest health insurer in the world by market capitalization, behind UnitedHealth Group and SVC Healthfew companies will benefit as much as Anthem from the growth of this industry.

3. Strong dividend growth set to continue

Anthem’s appeal to dividend growth investors doesn’t end with its promising earnings growth outlook.

The stock’s dividend payout ratio was just 17.4% in 2021. This gives Anthem the flexibility to take a balanced approach to share buybacks, debt repayments and acquisitions to generate adjusted diluted EPS growth in the future. That’s why I think Anthem will build on its 12-year dividend growth streak with increases similar to its last 13.3% rise.

Anthem’s 1% dividend yield may not be particularly attractive to income investors. But the low double-digit dividend growth makes up for that in my opinion.

4. Stock is a bargain for its quality

Anthem is a fundamentally sound stock. And the icing on the cake is that investors can buy Anthem at an attractive valuation.

Anthem’s forward price-to-earnings ratio of 15.2 is slightly below the healthcare plan industry average of 16.1. Even better, Anthem’s 12.9% annual earnings growth outlook is slightly above the industry average of 12.8%. Simply put, Anthem is an above-average stock at a below-average valuation. This is what makes it an intriguing stock to buy for dividend growth investors.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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