Investing is all about quality … or at least it should be.
When selecting stocks for DTA’s Income Builder Portfolio, I try to choose companies that check all the right “quality boxes.” (I threw the last one in there just to make sure you’re paying attention.)
The vast majority of the 26 businesses I have picked since we launched our real-money portfolio in January 2018 have checked most of those boxes, and now I am excited to bring aboard one of the “box-checkingest” companies out there — UnitedHealth Group (UNH).
On Tuesday, June 11, I executed a purchase order on Daily Trade Alert’s behalf for 4 shares of the nation’s largest health-insurance provider at $248.52 apiece.
“Quality” is a bit of an ambiguous term. I could be cute and say something like, “I know it when I see it,” but I do believe there are ways to quantify a company’s quality.
In addition to financial information provided by the companies themselves, I often use independent researchers and rating services such as Morningstar, Value Line and Standard & Poor’s.
UnitedHealth scores well across the board … as the following “Financial Sonar” from Jefferson Research illustrates.
UNH has grown its dividend 9-fold since it went to quarterly payouts at the start of this decade, and its 1.7% yield is just about its highest ever; the company’s recent 20% hike has brought it to $1.08/share.
Because we bought UNH before its next ex-dividend date (June 14), the IBP will receive $4.32 on June 25.
The portfolio’s Business Plan mandates dividend reinvestment (aka “dripping”), meaning approximately .017 of a share will come into the IBP. The September dividend will be calculated using the new share total (4.017), so the payout will be $4.34.
The combination of future dividend raises by UnitedHealth Group and dripping within the IBP will result in considerable income growth over time, and that’s going on with all of the companies we own. So you can see why we call this endeavor what we do.
Even when we talk about UNH’s dividend, quality comes shining through.
McLean Capital Management shows that the company has plenty of free cash flow to easily cover the dividend.
Meanwhile, Simply Safe Dividends gives UNH an almost perfect “Safety” score of 99.
By and large, analysts are bullish on UnitedHealth Group. For example, all 25 surveyed by Thomson Reuters believe UNH is either a “Buy” or a “Strong Buy.”
Value Line expects the price of UNH stock to go up by about 20% over the next 18 months (yellow highlight) and by as much as 55% in 3-5 years (red circle).
The analysts at Argus and CFRA also have great expectations for UnitedHealth, with 12-month price targets of $295 and $303, respectively.
Citing the company’s sub-17 forward P/E ratio and attractive 1.4 PEG ratio, Morningstar calls UNH a 4-star buy with current fair value of $300. (Morningstar’s extremely favorable opinion of UnitedHealth’s moat and management are circled.)
ValuEngine also says UnitedHealth Group is undervalued, with a fair price of about $294.
Using FAST Graphs, whether one looks at the long-term history or a more recent time frame, UNH appears to be fairly valued. In each image below, the end of the black Price line is just about even with the blue Normal P/E Ratio line.
Wrapping Things Up
So much quality … and reasonable valuation, too.
Indeed, the best question might not be, “Why did Mike select UnitedHealth Group for the Income Builder Portfolio?” but rather, “Why did it take 18 freakin’ months for Mike to finally pick UNH for the IBP?”
As always, each investor should conduct one’s own due diligence and assess one’s own goals before buying any stock.
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