U.S. health insurer UnitedHealth Group Inc. (UNH) announced that its board of directors has authorized a substantial hike of 30% in its quarterly dividend to 21.25 cents per share.
The increased dividend will be paid to on June 22, 2012, to the shareholders of record on June 15. UnitedHealth’s annual dividend yield will increase to 1.5% from the previous yield of 1.2%.
The dividend hike is supported by UnitedHealth’s strong balance sheet with a moderate leverage and its ability to generate significant cash flow. The recent quarter saw a cash flow of $1.1 billion. Management has projected $6.2 billion – $6.5 billion in cash flow for the full year 2012.
UnitedHealth has always been in favor of share buybacks and mergers as a way to deploy capital. Therefore, the company’s board has also approved the repurchase of 110 million shares, which is about 10% of UnitedHealth’s outstanding shares.
UnitedHealth has replaced the May 2011 authorization to purchase up to 110 million shares. At the end of May 2012, there were 33 million shares remaining under the previous authorization plan.
The stock of UnitedHealth gained 2.37% during the day. The jump in share price was most likely backed by the higher magnitude of dividend increase.
During May last year, UnitedHealth increased its quarterly dividend by 30% to 16.25 cents per share from 12.5 cents per share. Prior to this, the company increased its annual dividend to 50 cents per share from a meager 3 cents per share in June 2010.
The huge investments made by the company, amounting to $3.8 billion over the past couple of years, will incrementally benefit earnings going forward. These investments have been made in higher margin service segments, which have the potential of driving above-average long-term earnings growth.
This indeed shows room for incremental dividend raises going forward. Additionally, a strong balance sheet, moderate debt capital, a highly conservative investment portfolio and significant free cash flow generation will help UnitedHealth to sustain the attractive dividend payout. Share repurchase activity will further add to shareholder returns.
During December 2011, peer Aetna Inc. (AET) increased its quarterly dividend to 17.50 cents from 15.00 cents per share. Another peer WellPoint Inc. (WLP) paid an increased cash dividend of 28.75 cents per share on March 23, 2012. The company’s Board had increased the dividend by 15% on January 24, 2012.
UnitedHealth currently retains a Zacks # 2 Rank, which translates into a short-term Buy rating. Given its better-than-average fundamentals, we are also maintaining our long-term Outperform recommendation on its shares.
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