Is this Blue-Chip Dividend stock a buy?

Picking the best stocks in industries with promising growth prospects is the not-so-secret strategy for creating significant long-term wealth as an investor.

Few industries arguably have as bright a future as health insurance. The rising costs of medical care and the spread of chronic diseases bode well for the industry. This is why the global health insurance industry is expected to grow at an annual rate of 5.5%, from $2.1 trillion in 2021 to $3 trillion by 2028.

And humaneit is (HUM 1.99%) Its market capitalization of $55 billion makes it the fifth-largest listed health insurer on the planet. But is the stock currently a buy? Let’s take a look at the fundamentals and valuation of Humana to decide.

A reputation for exceeding revenue and profit estimates

When Humana shared its first quarter earnings report on April 27 for the period ended March 31, the company exceeded analyst consensus for revenue and non-GAAP diluted earnings per share (EPS) (adjusted). .

Humana generated $24 billion in revenue during the first quarter, representing 16% growth over the prior year. That beat analysts’ average revenue forecast of $23.5 billion for the quarter. So how did the company beat analysts’ earnings consensus for Q8 out of the last 10 quarters?

The health insurance industry’s secular tailwinds and Humana’s scale drove its medical enrollments up 1.1% year-over-year to 17.1 million in the first quarter. The other contributor to the company’s revenue growth in the quarter was higher premiums to keep up with inflation.

Humana recorded $8.04 of adjusted diluted EPS in the first quarter, a growth rate of 4.8% over the prior year period. That beat analysts’ average forecast of $6.83 for the quarter, which was the 10th quarter of the last 10 quarters the company has done so.

Rising claims and operating costs drove Humana’s non-GAAP net margin down 40 basis points year-over-year to 5.6% in the first quarter. This was partially offset by a 1.6% reduction in the number of shares outstanding to 127.5 million in the first quarter, the result of share buybacks.

Image source: Getty Images.

Superb dividend growth potential

Humana’s track record of exceeding analysts’ expectations isn’t the only reason to love the stock. Its low dividend payout ratio and high earnings growth outlook should result in considerable dividend growth.

Humana’s dividend payout ratio is expected to be just 12.5% ​​in 2022. That leaves it with funds to make acquisitions, repurchase stock and pay down debt. Along with the encouraging outlook for the health insurance industry, this explains why analysts believe Humana will post 13.9% annual earnings growth over the next five years.

The stock’s 0.7% dividend yield is well below the S&P500 1.6% of the index. But its potential for annual teenage dividend growth more than makes up for the low initial yield.

Quality at a reasonable price

Humana is a world-class company based on its fundamentals. And the current valuation seems to provide a good entry point for investors.

Indeed, Humana’s forward price-to-earnings ratio of 16 is only slightly above the health plan industry average of 15.5. Given that the stock’s 13.9% annual earnings growth potential is above the industry average of 12.7%, this bonus seems well deserved. This is what makes Humana an attractive buy for value investors.

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