Is this sizzling dividend stock a buy?

Fears about the health of the US economy have pushed S&P500 13% lower so far in 2022.

However, some stocks significantly outperformed the index. Up 24% since the start of the year, health insurer Cigna (THIS -2.39%) crushed the S&P 500. Is the stock still a buy or has it gone up too far, too fast? Let’s look at the company’s fundamentals and valuation to decide.

A growing company

Earlier this month, Cigna released its financial results for the second quarter ended June 30. Once again, the company exceeded analyst consensus estimates for revenue and non-GAAP (adjusted) diluted earnings per share (EPS).

Cigna reported second-quarter revenue of $45.5 billion, equivalent to a 5.4% year-over-year growth rate. For context, that was slightly higher than the $44.3 billion in revenue that analysts were expecting. For the 10th consecutive quarter, Cigna topped analyst consensus for revenue.

The company’s total number of customer relationships increased 6.9% from a year earlier to 191.3 million in the second quarter. Gains in pharmacy, U.S. commercial medicine, international health medicine, behavioral care and dental customers more than offset declines in U.S. government and Medicare Part D medical customers in the quarter. This larger customer base explains how revenues have increased slightly.

Cigna generated $6.22 of adjusted diluted EPS during the quarter, which equates to an 18.7% year-over-year growth rate. That beat the analyst’s average adjusted diluted EPS estimate of $5.62. What explains the company’s ninth profit in the last 10 quarters?

Cigna’s higher revenue base and a 20 basis point increase in non-GAAP net margin to 4.4% were the primary factors driving adjusted diluted EPS higher. The other piece of the puzzle was a staggering 7.7% reduction in the company’s outstanding shares to 318.3 million, due to share buybacks.

Over the next five years, analysts estimate that Cigna’s adjusted diluted EPS will reach 11.5% per year thanks to the promising outlook for the health insurance industry and the company’s huge share buyback program.

Image source: Getty Images.

Lots of room for dividend growth

Cigna’s 1.6% dividend yield is in line with the S&P 500 yield, so the stock doesn’t stand out as an income stock. But that’s because it really shines like a dividend growth take.

This is evidenced by the fact that Cigna’s dividend payout ratio will reach approximately 19.5% in 2022, leaving plenty of room for dividend growth. That’s why I believe dividend growth will outpace earnings growth in the future, which should lead to a teenage annual dividend growth rate.

Discounted valuation

Cigna is clearly a thriving business. Surprisingly, the market does not value it as such. This is evidenced by Cigna’s forward price-to-earnings (P/E) ratio of 11.4, which is considerably lower than the healthcare plan industry’s average forward P/E ratio of 16.7.

This steep discount is not due to a lack of growth prospects: Cigna’s expected annual earnings growth of 11.5% is about the same as the industry average of 12.6%. This is what positions the stock as a great buy for investors looking for a company with rising earnings.

Kody Kester has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

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