Elevance Health Stock: continues to grow, a solid buy (NYSE: ELV)

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Introduction

Elevance Health (NYSE: ELV) has far outperformed the S&P 500 (SP500) over the past 20 years. The total return, including dividends, is 1,900% (CAGR: 16.2%). The S&P 500 rose “only” 463% (CAGR: 9.0%). UBS places Elevance Health on its list of best stock ideas. Elevance Health is a health insurance company, these companies have the character of showing stable and predictable profit growth. They will not show big one-time profits. Steady growth character attracts me.

Total return of ELV shares
ELV total return level data by YCharts

Publicly listed companies in the same industry include UnitedHealth (UNH), Aetna Health Insurance (CVS), Cigna Health Insurance (CI), and Humana Health Insurance (HUM). These companies have also shown strong performance over the past 20 years. Humana leads the way, followed by UnitedHealth and Elevance Health. All of them strongly beat the S&P 500.

Elevance Health Total Stock Return
ELV total return level data by YCharts

It is worth investigating Humana and UnitedHealth in more detail. This article describes Elevance Health’s historic strong revenue and earnings growth, strong outlook, attractive stock valuation and share buyback program. The strong growth catalysts for further upward movement in the stock are higher interest rates, strong membership growth and the stock buyback program. The stock is a strong buy.

About the company

Elevance Health is a health benefits company that offers a variety of health care plans through affiliated companies such as Anthem Blue Cross and Blue Shield, Empire Blue Cross Blue Shield in New York State, Anthem Blue Cross in California, Wellpoint and Carelon. Blue Cross provides coverage for hospital services and Blue Shield for physician services.

Elevance Health is the largest for-profit healthcare company in the Blue Cross Blue Shield Association. The company had 46.8 million members under their affiliate health plans.

Elevance Health was officially known as Anthem and changed its name to Elevance Health in June 2022 to optimize and streamline the company’s brand portfolio.

Steady growing profits and good outlook

Over the past few years, the company has grown rapidly. From 2018 to 2020, operating revenue increased an average of 15% per year, medical memberships increased 7.5% overall, and earnings per share increased an average of 19% per year.

Growth and Direction of Elevance Health

Presentation Investor Day 2020 (Investor Relations – Elevance Health)

During the Presentation Investor Day 2021Elevance Health expects earnings per share to grow at an average annual rate of 12-15% from 2020 to 2025. Earnings per share grew 15.6% in 2021, ahead of expectations.

In recent years, Elevance Health has consistently exceeded analysts’ expectations. Elevance’s revenues are stable and predictable. I prefer to invest in companies that can grow their profits steadily with some predictability.

Elevance Health BPA Growth

Elevance Health BPA Growth (looking for Alpha)

The second quarter of 2022 was strong. Operating revenue increased 15.6% and medical enrollment increased 6.1% year over year. Adjusted earnings per share increased 14.4% year over year.

Elevance Health raised its outlook for 2022, with adjusted earnings per share expected to reach $28.70 (10.5% year-over-year growth).

Elevance Health invests its premiums in a portfolio of bonds, the value of the bonds fluctuates with changes in interest rates. This is not a problem for Elevance Health, as it holds the bonds until maturity. Rising interest rates go hand in hand with higher bond yields, boosting Elevance Health’s earnings. Profits are reinvested in bonds, further increasing profits. The Fed announced further hikes in the federal funds rate to calm inflation. Rising interest rates coupled with strong membership growth are two important growth drivers for Elevance Health.

Dividends, share buyback program and valuation

Elevance Health’s management rewards shareholders well by paying dividends in combination with a stock buyback program. The company has increased its dividend year over year, increasing at an average rate of 16.3% per year from 2011 to 2021.

Elevance Health Dividend Growth

Dividend growth (seeking alpha)

Repurchasing shares is a strategic move to increase earnings per share. The additional demand and reduced supply drives the stock price higher. Over the past 10 years, Elevance Health’s outstanding shares have been reduced from 325 million to 247 million, representing an annual decline of 2.7%. I expect this trend to continue, with shareholders benefiting greatly from share buybacks. As of June 30, 2022, $3.0 billion is available to redeem shares, which equates to a redemption yield of 2.5%.

Outstanding ELV Medium Shares
ELV Average Diluted Shares Outstanding (Annual) data by YCharts

The stock’s valuation is in line with competitors’ stock valuations. The table below shows the PE ratios and estimated total EPS growth from 2022 to the end of 2025 of Elevance Health and its competitors.

Company

P/E ratio

Estimated growth in total EPS 2022-2025 (source: SA)

Elevance Health

19.6

44.9%

UnitedHealth Group

28.3

47.5%

SVC Health

17.3

29.3%

Cigna

17.4

33.4%

humane

20.2

44.8%

UnitedHealth Group is highly rated with a PE ratio of 28.3. UnitedHealth’s EPS growth expectations are slightly higher than the others, but the high premium isn’t worth examining the stock in more detail. The other companies seem attractive with their PE ratios between 17 and 20 and their strong EPS growth expectations.

In the chart below, I have visualized Elevance Health’s PE ratio from 2003 to present. The financial crisis of 2007-2008 left a strong imprint on the entire financial sector. Confidence in financial companies had then completely disappeared. To determine the average PE ratio, I do not include the period of the financial crisis. The average PE ratio of Elevance Health is then 16.

EP ELV report
EP ELV report data by YCharts

With an average PE ratio of 16, I calculated what the stock price will be at the end of 2025. Analysts expect earnings per share of $41.80 in 2025. The stock will then be valued at 669 $. An annual return of 14.6% excluding dividends can be expected. Including the dividend, this equates to an annual pre-tax total return of 15.6%.

Conclusion

Elevance Health shares have risen an average of 16.2% over the past 20 years and have significantly outperformed the S&P 500 (CAGR: 9.0%). Elevance Health is a health insurance company that offers health insurance through various affiliates. The company is growing at a rapid pace, with average revenue growth of 15% over 2018-2020, member growth of 7.5% over the same period, and earnings per share that have increased to a CAGR of 19%. The second quarter of 2022 was a good quarter and management raised its outlook for 2022. Analysts expect Elevance Health 2025 adjusted earnings per share to be $41.80. Calculated using Elevance Health’s average PE ratio, an annual pre-tax return of 15.6% can be expected. With historically strong growth, enhanced prospects, a stock buyback program and an attractive stock valuation, Elevance Health is a solid buy.

Consultant talking with client in a meeting

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