Is UnitedHealth Group Incorporated (UNH) the Best Stock to Invest in for Medium Term?
We recently compiled a list of the 7 Best Stocks to Invest in for Medium Term. In this article, we will look at where UnitedHealth Group Incorporated (UNH) ranks among the best stocks to invest in for the medium term.
On September 18, the Federal Reserve reduced its policy rate by 50 basis points, lowering it to 4.75%–5.00% from 5.25%–5.50%. Following the announcement, stocks surged, with the broader market hitting a new intra-day all-time high and closing at its 39th record of 2024, marking the first since mid-July. The index has risen over 20% since the beginning of the year. The interest rate reduction has created new opportunities for investors, signaling a shift towards a more supportive monetary policy intended to boost economic activity. Lower interest rates generally result in reduced borrowing costs, encouraging both business expansion and consumer spending. This fosters a favorable environment, making medium-term investments, typically ranging from 3 to 5 years, more appealing.
To effectively execute this strategy, investors should evaluate several key factors in the companies they select. These include the stock’s performance over the past year, profitability, sales figures, debt levels, price-to-earnings ratio, and dividends. Additionally, assessing revenue growth and payout ratios can provide further insights.
Dividend stocks are often seen as good choices for medium-term investments, providing investors with passive income while they hold the stock. In addition, dividend-paying companies can be a smart investment during times of market volatility. A report by Hartford Funds showed that from 1940 to 2023, dividend income contributed an average of 34% to the total return of the broader market. The report also highlighted that in decades with total returns below 10%—such as the 1940s, 1960s, and 1970s—dividends made a significant impact on overall returns.
Dividend growth is the most favored approach within dividend investing, as it boosts investors’ income over time. Kirsten Cabacungan, an investment strategist in the Chief Investment Office for Merrill and Bank of America Private Bank, emphasized the significance of dividend growth strategies in investment planning. Here are some comments from the analyst:
“Generally, it’s larger, more mature companies that return capital to their shareholders in the form of dividends. Companies that have consistently increased their dividends tend to be more stable, higher quality businesses, which historically have weathered downturns and are more likely to have the ability to pay dividends consistently.”
A company’s dividend payout ratio is a crucial measure of its ability to maintain dividend flexibility. Firms that allocate most or all of their earnings to dividends may struggle under competitive pressure, as their cash flow might not be enough to sustain operations. A report by Nuveen highlighted that, historically, stocks with the highest payout ratios haven’t delivered the best long-term results. Instead, companies with moderate to moderately high payout ratios have tended to outperform over the past two decades among dividend-paying stocks. With this, we will now discuss some of the best stocks to buy for medium term.
Our Methodology:
For this list, we used a Finviz screener to to find dividend stocks with an average revenue growth of over 10% over the past five years, highlighting companies with consistent sales growth. From that selection, stocks with a five-year average payout ratio of under 40% were chosen, indicating a strong cash position. The final list includes 7 companies with the highest number of hedge fund investors, based on Insider Monkey’s Q2 2024 database.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
UnitedHealth Group Incorporated (NYSE:UNH)
Number of Hedge Fund Holders: 114
5-Year Average Annual Revenue Growth Rate: 10.32%
5-Year Average Payout Ratio: 34.5%
UnitedHealth Group Incorporated (NYSE:UNH) is a Minnesota-based health insurance company that offers related services to its consumers. Over the past ten years, the company has demonstrated itself as an exceptional investment, yielding nearly 570% returns and consistently exceeding the broader market, providing investors with significant gains. This track record underscores that investing in a top healthcare firm can be a dependable strategy for achieving strong and consistent returns, particularly as spending in the sector is projected to keep rising in the future.
UnitedHealth Group Incorporated (NYSE:UNH) has successfully attracted investors through its expansion strategies. In recent years, the company has expanded into related sectors, including home healthcare and analytics, to further diversify its operations. These initiatives are designed to provide greater value to both its partners and patients. Andvari Associates highlighted the strengths of the company in its Q2 2024 investor letter. Here is what the firm wrote:
“UnitedHealth Group Incorporated (NYSE:UNH) is one of the largest providers and distributors of services in the $5 trillion U.S. healthcare market. The company provides services to employers, individuals, and those eligible for Medicare and Medicaid. United’s Optum segment provides pharmacy benefit services and a slate of other insights and services to the major players in the healthcare space: physicians, hospitals, government agencies, and life science companies.
This is a company that provides essential services and has a strong wind at its back. Over two million people are enrolling in Medicare and Medicare Advantage every year. With the increase of healthcare spending every year, the value of the services and insights provided by Optum will only increase. United is a solid business with a high teens returns on its capital. After reinvesting in its businesses, United will likely return $16 billion in 2024 in the form of dividends and share repurchases off a revenue base of ~$380 billion.”
These initiatives have greatly contributed to the growth of UnitedHealth Group Incorporated (NYSE:UNH) over the years. Since 2011, the company’s revenue has more than tripled, increasing from just over $101 billion to nearly $372 billion by 2023. In the second quarter of 2024, UnitedHealth reported revenue of $98.8 billion, marking a 6.41% increase compared to the same period last year. In addition, its operating cash flow reached $6.7 billion, which is 1.5 times its net income.
UnitedHealth Group Incorporated (NYSE:UNH), one of the best stocks to buy, has been growing its dividends for 15 consecutive years. The company currently pays a quarterly dividend of $2.10 per share and has a dividend yield of 1.46%, as of September 19. It has a low 5-year average payout ratio of 34.5%.
According to Insider Monkey’s database of Q2 2024, 114 hedge funds, growing from 104 a quarter earlier, owned stakes in UnitedHealth Group Incorporated (NYSE:UNH). These stakes have a consolidated value of over $12.5 billion. Orbis Investment Management was one of the company’s leading stakeholders in Q2.
Overall, UNH ranks 3rd on our list of the best stocks to invest in for medium term. While we acknowledge the potential of UNH as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than UNH but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.