Winning stocks don’t always continue to win, but there is a tendency toward perennial market outperformance. Well-run businesses in promising industries tend to do better than the broader market.

And as a leader in the steadily growing health insurance industry, Cigna (CI) has made investors much richer over the last decade; a $10,000 investment in the stock 10 years ago would now be worth $63,000 with dividends reinvested. For context, that’s far more than the not-quite $30,000 that a $10,000 investment in the S&P 500 index would have blossomed into during that same time.

And these superior investment returns appear poised to continue. Let’s look deeper at Cigna’s fundamentals and valuation to find out why.

Increasing demand is powering growth
With operations in more than 30 countries around the world, Cigna is a truly international business. Unsurprisingly, this growing global presence has led the company’s market capitalization to grow to $99 billion. For context, this positions Cigna as the fourth-largest health insurer in the world.

The Connecticut-based business recorded $45.3 billion in revenue during its third quarter ended Sept. 30, which was 2.2% higher over the year-ago period. What was behind Cigna’s modest growth for the quarter?

The company’s total customer relationships grew by 6.1% year over year to 192.5 million in the quarter. This was driven mostly by growth in customer relationships in Cigna’s pharmacy business. The company’s pharmacy membership base increased by 4.9% over the year-ago period to 108.7 million during the quarter. This propelled Cigna’s pharmacy revenue 5.6% higher year over year for the quarter to $32.8 billion.

The company’s total medical, behavioral care, and dental insurance customers also grew in the quarter. This was only partially offset by an 8.9% decline in Cigna’s Medicare Part D membership base during the quarter.

The managed care company posted $6.04 in non-GAAP (adjusted) diluted earnings per share (EPS) for the third quarter. This represents a 5.4% growth rate over the year-ago period. An increase in expenses in the quarter resulted in a nearly 30 basis point drop in Cigna’s non-GAAP net margin to 4.1%. But this dip in profitability was more than neutralized by an 8.9% decline in the company’s outstanding share count stemming from share repurchases. This explains how Cigna’s adjusted diluted EPS growth outpaced its revenue growth during the quarter.

As the population ages and more individuals are diagnosed with chronic medical conditions, the demand for pharmacy services and health/dental insurance is sure to rise. This is why analysts anticipate that Cigna will deliver 11.4% annual adjusted diluted EPS growth over the next five years.

Dividend growth potential is solid
Cigna offers investors a 1.4% dividend yield, which is just below the S&P 500 index’s average 1.6% yield. The company may not appeal to income investors, but it will almost certainly be a gem to dividend growth investors.

That’s because Cigna’s dividend payout ratio will clock in a tad more than 19% in 2022. This gives the company the capital necessary to invest in future company growth while reducing debt and repurchasing shares. That’s why I believe Cigna will have no problem delivering low-double-digit annual dividend growth for some time.

The valuation is a steal
Cigna stock has soared 41% year to date, which is considerably higher than the healthcare plans industry’s average gains of 8% so far in 2022. This would lead investors to likely conclude that the stock’s valuation is too stretched.

But with its forward price-to-earnings (P/E) ratio of 13.1 coming in well below the healthcare plans industry’s average forward P/E ratio of 17, Cigna remains a great value for dividend growth investors. This is because its 11.4% annual earnings growth potential is almost in line with the healthcare plans industry average of 12.6%.

— Kody Kester

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Source: The Motley Fool