This article first appeared on Dividends & Income
I am a big fan of rewarding a job well done.
When one of my kids brought home a stellar report card, she or he would get a special dessert. When a co-worker went above and beyond the call of duty, I would send him or her a congratulatory email and copy in our boss. When politicians lead effectively, I vote for them in the next election, regardless of party affiliation.
BlackRock (BLK) and UnitedHealth Group (UNH) have been two of the better performers in DTA’s Income Builder Portfolio, so I am rewarding them by deciding to have us buy more shares of both stocks.
Actually, I’m mostly kidding about that last reward scenario.
However, investing is supposed to be forward-looking … so it really should be about how I believe companies will perform next month and next year and next decade, not about how they did in the past.
Well, the future looks plenty promising for BlackRock and UnitedHealth, too.
So later today, I will split Daily Trade Alert’s $1,000 semimonthly allocation between the two blue-chip industry leaders.
Big-Time Winners
Having said all that, let’s take a quick look at what has transpired the past couple of years before we look ahead.
We bought BlackRock, the world’s largest asset manager, for the IBP in late 2018 and then doubled our stake a few months later — and our position has experienced a tasty 63.8% total return.
As the following table shows, had we made the same investment in the SPDR S&P 500 Trust ETF (SPY) on the same dates, the gain would have been less than half as much (30.3%).
Meanwhile, our June 2019 and August 2019 purchases of UnitedHealth Group, the nation’s leading health-insurance provider, have resulted in a 40% total return – another huge “victory” for the Income Builder Portfolio over the market.
BLK ranks fifth among the IBP’s 35 components in total return, and UNH is No. 9.
As far as the dividend goes, BlackRock has increased its payout twice, by a total of 16%, since we initiated our position. UnitedHealth also lifted the dividend 16% in its only raise since we first bought it.
Our BLK position has generated $105.31 in dividends, which have been reinvested to buy nearly a quarter of a share of the stock; UNH has produced $50.76 in income, good for an additional fifth of a share for the IBP.
Solid As a Rock
Best known for the iShares ETFs it offers investors, BlackRock reported earnings on Oct. 13, and it unveiled a spectacular quarter despite COVID-19 headwinds that adversely affected other companies in the industry.
The graphic below, from the company’s earnings presentation, shows just how big the third quarter of 2020 was.
The company reported 7% annualized organic asset growth, an 18% year-over-year increase in revenue, a 17% advance in operating income, and 29% growth in adjusted EPS.
While BlackRock did not provide forward guidance, analysts are very high on the company’s future.
For example, in raising its 12-month price target to $702, Credit Suisse said:
This was BLK’s 6th consecutive quarter of positive active equity flows, which contrasts to large redemptions for peers. … BLK stock is up +26% YTD relative to +6% for traditional peers as the firm’s diverse global investment platform, differentiated technology and best-in-class ETF suite were rewarded by investors in a volatile period. Going forward, we look for continued market share gains and positive organic growth to translate into high single-digit to low double-digit EPS growth.
Financials haven’t fared very well so far in 2020, making BlackRock’s showing all the more impressive.
Challenging Times, But A Healthy Outlook
When possible, I like to wait until after quarterly earnings reports are released before I commit to buying stocks for my personal portfolio, and the same is true for my IBP selections.
UnitedHealth Group presented its earnings on Oct. 14 (one day after BlackRock did), and it reported that the pandemic and other economic pressures negatively affected its bottom line.
Although Q3 earnings handily beat analysts’ estimates, they were down about 10% compared to the third quarter of 2019.
UNH Earnings – Graphic from Simply Safe Dividends
The good news was that revenue not only smashed estimates, it grew by 8% year-over-year — led by a 21% surge for Optum, the company’s health information technology and services arm.
UNH Revenue – Graphic from Simply Safe Dividends
UnitedHealth Group also raised its guidance for the full 2020 fiscal year, and now expects adjusted EPS of $16.50 to $16.75.
Regarding 2021, Credit Suisse analysts noted that UNH management is saying “the range of possible outcomes for next year is unusually wide,” adding:
Factors making next year more difficult to forecast include: the on-going impact of the COVID-19 pandemic; potential variations relative to care patterns (including pent-up demand); COVID-19 treatment costs and testing; UNH’s customer assistance initiatives, etc.; and the uncertain economic backdrop.
Despite the uncertainty, Credit Suisse is forecasting 8% to 11% EPS growth for 2021.
The other real-money public portfolio I manage, the Grand-Twins College Fund, also owns a small stake in United HealthGroup.
The “quality metrics” for both UNH and BLK are among the best in their sectors.
Wrapping Things Up
I will discuss the valuation of each company in my post-buy article, which is scheduled to be published on Wednesday, Oct. 21.
Spoiler alert: Both companies, which were quite undervalued when we bought them way back when, are now at best fairly valued.
That will happen when most investors like what they see and send share prices up, up and away — despite a pandemic that has devastated the global and U.S. economies.
I am looking forward to “rewarding” these fine companies by increasing the size of the Income Builder Portfolio’s stakes in them.
As always, investors are strongly encouraged to conduct their own due diligence before buying any stocks.
— Mike Nadel
We’re Putting $2,000 / Month into These StocksThe goal? To build a reliable, growing income stream by making regular investments in high-quality dividend-paying companies. Click here to access our Income Builder Portfolio and see what we’re buying this month.
Source: Dividends and Income