Following the strong first-quarter results and with the expectation of higher profits in the future, UnitedHealth Group Inc. (UNH) has planned to increase its quarterly dividend by 30% and enhance the share repurchase program, replacing the earlier one.
Accordingly, UnitedHealth will raise its dividend to 16.25 cents per share from 12.5 cents per share. The increased dividend will be paid on June 21 to the shareholders of record as of June 7.
In addition, UnitedHealth has always been in favor of share buybacks and mergers as a way to deploy capital. Therefore, the company has approved the repurchase of 110 million shares, which is about 10% of UnitedHealth’s outstanding shares, at the cost of about $5.3 billion.
UnitedHealth has replaced the February 2010 authorization to purchase up to 120 million shares. At the end of April 2011, there were 28 million shares remaining under the 2010 authorization.
Besides UnitedHealth, Aetna Inc. (AET) has declared a quarterly dividend of 15 cents, while Humana Inc. (HUM) announced a 25 cents dividend in 2011. Prior to this year, the company had last increased its quarterly dividend to 12.5 cents in 2010.
Further, the dividend hike and stock buyback plan was supported by better-than-expected first-quarter 2011 results of its peers, which in turn, also raised their full-year earnings forecasts. This further boosted the company’s confidence that the industry would be able to sustain profits under the healthcare overhaul started last year.
The new rule primarily requires the health insurers to pay out a minimum percentage of premiums on medical claims or issue rebates to consumers. This was done to maximize the care toward individuals and minimize the profits or big salaries of the companies.
Initially, investors were also concerned that the new requirement for medical-loss ratios (MLRs) would hurt profits. However, WellPoint and other insurers expect it to be manageable at present.
In order to ease the MLR impact, the insurers have revised their broker commissions and included adjustments to the ratio's formula that allows insurers to check quality improvements, while also aiding the industry to meet MLR minimums.
The move by UnitedHealth reflects the effort made to restore investors’ confidence in the company’s stability. UnitedHealth posted solid first -quarter 2011 net earnings of $1.22 per share, well ahead of the Zacks Consensus Estimate of 89 cents, which also compares favorably with $1.03 per share reported in the prior-year quarter. Results were aided by strong revenue growth from UnitedHealth as well as from Optum businesses.
However, UnitedHealth’s operating costs increased 10% year over year to $3.6 billion in the first quarter, the company generated cash and short-term Investments of $12.2 billion, up 8.5% from 2010 end.
On the back of an improving economic scenario, which will translate into stronger revenues besides gaining synergies from medical cost control efforts, management expects its 2011 operating earnings to be in the range of $7.2 billion to $7.5 billion coupled with $101 billion of revenues.
UnitedHealth spent $620 million in the first quarter of 2011 to buy back 15 million shares, and expects to spend $2 billion to $2.5 billion in repurchasing shares in full-year 2011.
We think a strong balance sheet, moderate debt capital and significant free cash flow generation will help UnitedHealth to sustain the attractive dividend. Share repurchase activity will further add to shareholders’ returns.
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