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UnitedHealth Is a Dividend-Raising, Share-Repurchasing Machine

UNH doesn't boast a screaming yield, but considering its current rate of dividend growth, you shouldn't be put off


UnitedHealth (UNH) hiked its dividend by a whopping 34% last week, proving again why UNH has a reputation for shareholder friendliness.

UnitedHealth Group UNHDividend boosts of 30%-plus are nothing to take lightly, but they’re almost routine for UNH stock. UnitedHealth raised its dividend by 32% last year and 31% the year before. UNH began paying regular quarterly dividends in 2010, and growing the dividend has quickly become an annual ritual.

After the most increase, UNH stock will pay $1.50 per share, which works out to a dividend yield of about 1.9%, roughly in line with the market average.

Of course, UnitedHealth’s cash spend isn’t limited to dividends. UNH also has been a serial repurchase of its stock, reducing its share count by 30% since 2008. And UnitedHealth has the authorization in place to buyback another $100 million, or roughly 10% of the remaining shares of UNH stock outstanding.

I am a big believer in share buybacks if they are done selectively, at reasonable prices, and if they are used to legitimately reduce share count rather than simply mask the dilutive effects of executive stock options. And in my book, UnitedHealth passes these criteria with flying colors.

But however much I might like buybacks, dividends send a much more powerful message.

Putting it plainly, there is no greater sign of confidence by management than raising the cash dividend. I would argue that this trumps even insider buying as a sign of business health because there is a perceived permanence to a cash dividend. A dividend cut is absolutely devastating to investor morale, so company boards will generally only raise a dividend if they believe, without a doubt, that the dividend is sustainable.

And in UnitedHealth’s case, sustainability is beyond doubt.

The payout ratio is a very modest 21% of earnings, and UnitedHealth’s revenues, earnings and cash flows all continue to post healthy gains. Over the past five years, UNH has seen its revenues, earnings and free cash flows per share grow by a cumulative 62%, 70% and 34%, respectively.

At a 1.9% yield, UNH stock is not a high yielder, per se. But it has the healthy characteristics you would want in a long-term dividend payer, and, again, it is raising its payout at a blistering rate.

Bottom Line

Is there anything not to like about UnitedHealth?

Well, remember, UNH is a health insurance stock, and the long-term effects of the Affordable Care Act (aka Obamacare) on the industry have yet to be seen. Initially, it appears that Obamacare will be a net benefit — the industry will see more paying customers, and they have been able to pass on to their customers any added expenses due to expanded coverage of preexiting conditions. But it is not altogether clear if this will continue to be the case.

My fear is that, due to voter complaints over rising premiums, profitability might effectively be regulated away.

That is a long-term risk to consider. But for the next several years, UNH stock is a worthy candidate for any dividend growth portfolio.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.

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