Investors who seek the steady returns from dividends often must settle for slower share price growth. A select number of stocks, however, have established track records of delivering both robust price appreciation and strong dividend growth. Per Barron's, these four stocks are standouts in this regard: health insurer UnitedHealth Group Inc. (UNH), animal drug and vaccine producer Zoetis Inc. (ZTS), semiconductor maker Nvidia Corp. (NVDA) and payments processor Mastercard Inc. (MA). (For more, see also: UnitedHealth Beats on Earnings; Stock Sets All-Time High.)
|Stock||Dividend Yield||Dividend Growth Rate||YTD Gain|
|S&P 500 Index (SPX)||1.8%||13.4%||5.3%|
Sources: Barron's for dividend growth rates and YTD price gains through July 31. S&P 500 yield per The Wall Street Journal. Dividend growth rates are the average annual increases recorded over the past 5 years.
The figures above reveal a caveat with this analysis. While these companies have been increasing their dividends rapidly, their yields nonetheless are far below what income-oriented investors normally would seek. With the highest dividend yields in the group, we select UnitedHealth and Zoetis for further discussion.
UnitedHealth: 'Envy of the Industry'
While UnitedHealth derives about two-thirds of its revenues from health insurance, it is set apart from key rivals in this industry by its fast-growing Optum division, which offers health-related data and analytics, pharmacy benefits management (PBM) and urgent care services, Forbes notes. They add that UnitedHealth also is a leader in health care management, another fast-growing area that includes health maintenance organizations (HMOs), preferred provider organizations (PPOs) and point of service plans (POS). As a result, the company is outpacing rival insurers in the growth of revenues and earnings.
A major challenge for health care companies is "making this wildly complex industry more efficient," writes Louis Navellier, editor of the Growth Investor Newsletter. Commenting on UnitedHealth's 33% annualized growth rate over the past three years, he attributes this performance to the company's consistent efforts to stay in the forefront of emerging trends in healthcare. Examples that he cites include: its chronic care facilitates for an aging U.S. population; the 91 million persons served by its OptumHealth unit, which seeks to deliver integrated health care services and solutions to employers, governments and individuals; and its pharmacy benefits management (PBM) unit, OptumRx, which serves 65 million people. (For more, see also: UnitedHealth Stock Stabilizing on Medicare Advantage.)
Enrollments for UnitedHealth's insurance plans grew at double-digit rates in the first quarter, and earnings were up by 12.5%, per Navellier. The Optum division posted 29.2% earnings growth, with double-digit increases in each of its units, he adds. According to Investor's Business Daily, "UnitedHealth's diversified revenue stream has been the envy of the managed care industry," and rivals are scrambling to "mirror, as well as adapt, UnitedHealth's model for success."
Zoetis: Rising Animal Spirits
Seeking Alpha has commented favorably on the company's strategy for growth that combines new product development and acquisitions. Seeking Alpha notes that Zoetis claims to be the world's largest producer of animal health products, and it operates through 51 subsidiaries across the globe. The company is a 2013 spinoff from Pfizer Inc. (PFE), with a diversified product line that includes medications and vaccines for livestock and pets alike, per Zacks Equity Research.
Revenue growth is being boosted by acquisitions of key product lines from other manufacturers, and Zacks cites an "impressive" track record of "beating earnings estimates consistently," with an average positive earnings surprise of 4.5% over the last four reported quarters, including a 7.1% earnings beat in the first quarter of 2018. Zoetis has received U.S. approval for a new swine vaccine, Zacks notes, while various major products for cattle and domestic pets have been cleared for use in a number of countries around the world.
"Our goal has always been to increase our dividend at—or faster than—the growth of our adjusted net income," as Glenn David, chief financial officer (CFO) of Zoetis, told Barron's. He added that the company has a policy of returning excess capital to shareholders through dividend growth and share repurchases. Nvidia's CFO offered similar comments during an investor conference in June, per Barron's, but with the proviso that making necessary investments in the business held priority.