Cigna Corp. (CI, Financial) has only increased its dividend twice in the last decade, but the first one was a 9,900% increase in 2021 followed by a 12% increase for the upcoming March 24 payment date.
Prior to these increases, the company had paid a small pittance of an annual dividend. While two increases in a row, even of this magnitude, don’t mean that the company is a Dividend Aristocrat in the making, Cigna’s business model, payout ratios and balance sheet likely mean that shareholders will continue to see high rates of growth in future years.
Let’s look closer at why I believe Cigna is in the early innings of high dividend growth.
Company background and results history
With annual sales above $174 billion, Cigna is a leading provider of insurance products and services. The company offers customers medical, dental, life and disability insurance through a variety of channels, including individual, employer and government- sponsored plans. The company also has more than 107 million pharmacy customers and total medical customers of 17 million. Cigna is valued at $78 billion today.
Cigna reported fourth-quarter and full-year 2021 earnings results on Feb. 7. For the quarter, revenue was higher by almost 10% to $45.7 billion, while adjusted earnings per share of $4.77 were well ahead of $3.51 in the prior period. Both figures were higher than what Wall Street analysts had anticipated.
For the year, revenue grew 8.6% to $174 billion while adjusted earnings per share improved to $20.47 from $18.45 in 2020.
Cigna has been no stranger to strong growth as revenue is up almost seven-fold over the last decade. Revenue has a compound annual growth rate of 47% over the last five years.
Earnings per share growth has also been impressive, with a five- and 10-year CAGR of 18.3% and 14.6%. The early part of the last decade did see some contribution from share repurchases, but net profit improved every year except for 2016 during this period.
These growth rates occurred even as the share count ballooned to nearly 140 million shares in 2018 as a result of Cigna’s $67 billion purchase of pharmacy benefit manager Express Scripts. This acquisition has added meaningfully to both the company’s top and bottom line, likely making it one of the key reasons that Cigna has raised its dividend after more than a decade of stagnant payments.
Leadership stated on the conference call that it expects to earn at least $22.40 per share in 2022, which would be a 9.4% increase from last year.
Dividend history and recession performance
Cigna’s dividend was held constant at 4 cents per share annually from 2009 through 2020. The company abruptly changed its dividend policy to the more traditional quarterly payment system and raised the total dividend to $4 in 2021. The company followed that increase up with a 12% raise for the upcoming March payment date.
Cigna may not have raised its dividend through the most recent recession, but its business performed better than most.
Below are the adjusted earnings per share results before, during and after the 2007 to 2009 time period for the company:
- 2006 adjusted earnings per share: $3.15
- 2007 adjusted earnings per share: $3.96 (25.7% increase)
- 2008 adjusted earnings per share: $3.42 (13.6% decrease)
- 2009 adjusted earnings per share: $3.98 (16.4% increase)
- 2010 adjusted earnings per share: $4.64 (16.6% increase)
- 2011 adjusted earnings per share: $5.21 (12.3% increase)
- 2012 adjusted earnings per share: $5.99 (15% increase)
Cigna’s earnings per share did fall almost 14% in 2008, but quickly rebounded to make a brand new high the very next year. Earnings have only been lower than the prior year once since this period in 2016, and the decline was small at just 6.5%.
The company also performed well during the worst of the Covid-19 pandemic. Revenue, earnings per share and net profit increased 14.3%, 10.9% and 4.9% in 2020, showing the pandemic did little to slow the company’s overall growth.
Dividend growth and payout ratios
Cigna was able to raise its dividend to the tune that it was in 2021 because its payout ratios are very low.
Shareholders of the company received $4 of dividends per share in 2021, resulting in a payout ratio of just 20%. Prior to this, Cigna’s payout ratio was near zero. The new annualized dividend is $4.48, giving the stock a projected payout ratio of 20%.
Free cash flow also shows a dividend that is safe as well. Again, prior to 2021, very little of the free cash flow was used to pay dividends.
Cigna distributed $1.34 billion in dividends last year while generating free cash flow of $6 billion. This results in a free cash flow payout ratio of 22%. It should be noted the company averaged free cash flow of nearly $7 billion for the three prior years. The company has guided toward roughly this amount of free cash flow for 2022, meaning the projected payout ratio for the new year is likely to be lower than the already very healthy payout ratio seen in 2021.
Both of Cigna’s payout ratios were at 20% last year, which, based on the most recent dividend increase, is likely an area the company is looking to maintain. As earnings and free cash flow grow, so shall the dividend.
Shares yield 1.9% today, topping the 1.4% average yield of the S&P 500 Index.
The impact of debt of dividend security
Besides high payout ratios, debt obligations can often be the cause of a dividend cut. Fortunately for Cigna shareholders, the company’s debt doesn’t appear to be an issue.
Cigna had interest expense of $1.2 billion last year. Total debt stood at $33.7 billion, giving the company a weighted average interest rate of 3.6%.
The image below shows what level the weighted average interest rate would need to reach before Cigna’s free cash flow was unable to cover dividend distributions.
Source: Author’s calculations.
Cigna’s weighted average interest rate would need to rise above 17.6% before its dividend was no longer covered with free cash flow. Recall that the company’s average free cash flow, as well as its guidance for 2022, are well above what was generated last year. This means the dividend is likely even safer with regards to Cigna’s debt obligations.
Valuation analysis
Along with a safe dividend, shares of Cigna appear undervalued.
With the stock trading at $232, Cigna has a forward price-earnings ratio of 10.4 using company guidance for 2022. This is a discount to the 10-year average multiple of 12.3 times earnings, according to Value Line.
The GF Value Line also shows Cigna to be trading below its intrinsic value.
With a GF Value of $262.68, Cigna has a price-to-GF Value ratio of 0.88. Meeting the GF Value implies a 13.2% return from current levels. Add in the dividend and total returns could reach into the mid-teens. Shares receive a rating of modestly undervalued from GuruFocus.
Final thoughts
Cigna doesn’t have the dividend growth history of some of the Dividend Aristocrats or Dividend Kings, but it does have a good track record over the last two years. The company has seen its revenue and earnings grow at high rates over the past decade, aided by timely acquisitions.
This has positioned the company to be able to raise its dividend from 4 cents annually as recently as 2020 to an expected $4.48 in 2022. And with very low payout ratios and a debt position that is unlikely to impede future growth, income investors can be comforted that today’s distribution can be considered extremely safe.
All of this suggests Cigna could be one of the next dividend growth superstars. For investors looking for such an investment, not to mention one that appears undervalued, Cigna could be an excellent opportunity.
