One of my largest holdings, UnitedHealth Group raised their dividend this month. The UnitedHealth Group dividend now stands at $.90.
This year’s bump marks a 20% increase over last year. That’s a pretty sweet increase when it comes to a mature large cap company; one that already paid $3 per share in dividends annually.
The company has paid a 3 cent annual dividend since 1990. However, it wasn’t until 2010, a few years after I started accumulating my position that they began to raise it. The annual dividend became quarterly with a 50 cent annual payout in 2010.
Since then, the company has grown that dividend at a 28% clip and as of this month, the forward annual dividend payout is $3.60 per share.
That’s a pretty kick ass increase over a few years. The stock price has also grown at a similar pace leading to a yield that trails the market even if growth far eclipses it. The forward yield at today’s prices is about 1.5% but it’s not the yield that still keeps me invested in the stock, it’s the potential for further growth.
When I bought the company, I new it had the potential to eventually pay dividends. Health insurance is a nice recurring cash flow business. At that point, UNH was still heavily investing that cash in growth opportunities. That was a great but I knew sharing a little cash with investors wouldn’t hurt either. Management apparently felt the same way as they instituted a dividend growth policy in 2010.
Even with the dividend, UNH didn’t stop their focus on growth as evidenced by their results in this slide from a recent investors presentation.
The company knew they could issue a dividend and still have plenty of money left for growth. The 50 cent dividend paid out in 2010 was only 11.5% of their adjusted EPS. In that same year, the company paid out $500M in dividends against nearly $5.5B in free cash flow.
It was at that point that I knew this would be a long term winner. It was clear that management was committed to rewarding shareholders in the form of dividends but didn’t want to sacrifice growth opportunities to get that done. Investors had the potential to get long term return both in the form of earning and dividend growth.
I already mentioned that since 2010, the dividend has grown 28% per year. However, the best part of that is that revenues, EPS and operating cash flows have grown at a great clip as well.
The company has really executed well on both fronts. I knew it was a cash cow business but I didn’t know how well management would invest that money. They made excellent acquisitions and have become an all around healthcare giant.
They took a pretty balanced approach returning almost 40% of excess capital to investors in the form of dividends and share repurchases. The rest they reinvested in the business growing revenues at an excellent clip.
That in turn led to free cash flow growth and accompanying stock price appreciation.
UNH really exemplifies what I look for in a long term investment story. It was a growth story when I first looked at it but as is often the case, a growth story eventually becomes a dividend story as well.
The company was and continues to be a cash cow. That means they produce excess cash which is always a good thing when combined with excellent management. They can either return that cash to shareholders or re-invest in the business for growth.
The company’s management has done a good job of walking the line between the two. They did choose to focus more on the growth side while they expand their operations and I expect that continue in the near term.
That means great things for investors because I can benefit both from price appreciation and a growing dividend. Today, after a 20% raise and a 28% annual raise since 2010, the company’s payout ratio stands at 0.26. In 2017, the company generated $11.5B in free cash flow and paid out $2.7B in dividends. The best part is that these cash flows are expected to grow nicely into 2018 as well. That likely means another solid bump in 2019.
Those are the kind of ratios I like as a dividend investor. I’m not simply looking for companies that stay static and pay most of their earnings out in cash. I’m looking for companies whose management knows how to put excess money to use. The yield may not be high on this one but that’s because management has executed on the growth plan so well.
The truth is that it’s not always about yield when it comes to dividend investing. A high yield may mean a stagnating price and that’s never a good thing. When I invest for the long term, I want a company that’s focused on top line and bottom line growth. Often, you’ll get the added benefit of dividends when that happens as was the case here.
My dividends have grown a ton but so has the stock price. Based on what I’ve seen recently, I’m pretty confident that can continue and wouldn’t be surprised if I see 20% dividend bumps for quite some time from this company.
I have sold some shares of this company in the past few years as it became too big a part of my portfolio. That’s despite not buying much in the last few years. That’s how you know a company is growing. I have no plans to buy any more soon but I do plan to hold what I have for quite some time.
The stock like many right now seems expensive against historical valuation with a 20 forward P/E. However, I still like it at this price since the company has changed a lot in recent years. It went from a pure health insurer to a growth machine with tentacles that stretch into all areas of health care. It’ll be interesting to see where management takes it from here.
It’ll also be nice to see my June dividend numbers get buoyed but this bump.
Disclosure : Long UNH