Last Friday, health insurer Aetna Inc. (AET) announced that it has increased its quarterly dividend by 17% to 17.5 cents per share. The new dividend will be paid on January 27, 2012, to shareholders of record as on January 13, 2012.
With this increase, Aetna’s annualized dividend yield has moved to 1.7% from 1.5%. This keeps the company ahead its peers including UnitedHealth Group Inc. (UNH) (offers 1.3% dividend yield), WellPoint Inc. (WLP) (1.5%), Humana Inc. (HUM) (1.0%) and CIGNA Corp. (CI) (0.10%).
With heavy cash inflow attributable to strong results for the nine months ended September 30, 2011 (operating earnings per share up 38% year over year), this marks Aetna’s second dividend hike this year. Previously, in February, the company increased its dividend from 1 cent to 15 cents per share.
Aetna has always preferred buying back stocks than paying dividend as a way to reward shareholders. For the past 10 years, it has been spending approximately 81% of cash flow from operations on share repurchases. Prior to the February dividend hike, Aetna used to offer token annual dividends (4 cents in 2010). But, the company changed its capital deployment strategy since February to restore investors’ confidence amid increased concerns about the impact of the HealthCare Reform on the company’s performance.
However, Aetna’s witnessed better-than-expected results in the first three quarters of 2011 and the minimum medical loss ratio mandate that started at the beginning of this year did not have any major negative repercussions on the profitability. Moreover, results of the last nine months reflected strong performance across all product lines as a result of lower-than-projected utilization, disciplined execution of pricing and medical cost management strategies.
We believe that Aetna will continue increasing dividend going forward as the tailwinds— lower medical utilization, positive accretion from CVS Caremark pharmacy benefit management deal, higher demand for experience rated business and rational pricing – offset the headwinds — lower commercial risk membership, Medicaid pricing pressure. This would result in higher-than-expected earnings.
Aetna’s dividend paying ability will also be supported by significant earnings accretion from its successful capital management strategy ($1.6 billion on acquisition and $1.2 billion on buying back shares for the nine months ended September 2011). Our optimism on potential dividend increment from the company has further strengthened by the fact that the company has recently revised its 2011 earnings guidance upwards for the third time. Currently, the company expects 2011 earnings per share of $5.00, up from $4.60–$4.70 previously.It has also indicated that its 2012 earnings would be at least $4.80 per share.
Aetna currently retains a Zacks # 1 Rank, which translates into a short-term ‘Strong Buy’ rating. Considering the fundamentals, we are also maintaining our long-term “Outperform” recommendation on the shares.
AETNA INC-NEW (AET): Free Stock Analysis Report
CIGNA CORP (CI): Free Stock Analysis Report
HUMANA INC NEW (HUM): Free Stock Analysis Report
UNITEDHEALTH GP (UNH): Free Stock Analysis Report
WELLPOINT INC (WLP): Free Stock Analysis Report
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