UnitedHealth Group Inc. will raise its quarterly dividend 30 percent as the health insurer and its competitors continue to benefit from strong performances that have left them flush with cash.
The Minnetonka, Minn., insurer said the dividend increase to 16.25 cents from 12.5 cents and a new share buyback program it also announced Wednesday reflect continued growth in both its benefits and services businesses.
Insurers started the year facing a new health care overhaul rule that investors feared would crimp profits. But the five largest health insurers _ including WellPoint Inc., Aetna Inc., Cigna Corp. and Humana Inc. _ all reported better-than-expected first-quarter earnings, with net income growth ranging from 4 percent to Cigna's 52 percent.
Their share prices have climbed 37 percent on average this year, trouncing the 4.7 percent gain by the Standard & Poor's 500 index.
UnitedHealth's stock price has jumped 33 percent, and that growth is part of the reason the insurer raised its dividend, Bernstein analyst Ana Gupte said. Its shares had climbed so much that it diluted the yield on its previous dividend to around 1 percent, based on Tuesday's closing price of $47.96. That fell below the average offered by other managed care companies, making the stock less attractive to investors in search of higher yielding stocks.
"This was something investors had been asking them to do for a while," she said. "They're expected to do it to be competitive with their peers."
The dividend yield is calculated by dividing the annual dividend by the company's stock price.
Last May, UnitedHealth, the largest health insurer based on revenue, became the first big insurer to debut a quarterly dividend when it announced the 12.5-cent payment. This year, Aetna announced a 15-cent quarterly dividend. WellPoint, which operates Blue Cross Blue Shield plans in several states, and Humana then announced 25-cent dividends.
The insurers are part of a broader trend. A total of 184 companies in the S&P 500 have either started or raised dividends so far this year, up from 104 at the same point last year. S&P Senior Index Analyst Howard Silverblatt said 13 have started dividends, a total he calls "phenomenal."
He said companies have been waiting to see steady earnings and cash-flow improvement before starting dividends, and it's now "catch-up time."
Dividend yields for UnitedHealth, Aetna, WellPoint and Humana average nearly 1.4 percent, which is well below the average of 2.96 percent for S&P health care companies. But Silverblatt said dividends in other health care sectors, like the pharmaceutical industry, have been around much longer and have had a chance to grow.
Health insurers entered 2011 facing a new rule that essentially requires them to pay out a minimum percentage of premiums on medical claims or issue rebates to consumers. The goal behind the law is to make sure a good portion of the premiums an insurer collects goes toward care and not profits or big salaries.
Insurers have taken heavy criticism from consumers and government officials in recent years for reporting fat profits and still delivering steep premium hikes to some customers, particularly those with individual or small-group employer-sponsored coverage. Insurers attribute the premium hikes to the rising cost of care.
Investors were concerned that the new requirement for what is known as medical-loss ratios, or MLRs, would hurt profits. WellPoint has said it expects to take a $300-million hit this year from the provision. So far, though, analysts say the impact from the new rule appears to be manageable.
Insurers have changed broker commissions to ease the MLR impact, and adjustments to the ratio's formula that allow insurers to count things like quality improvements also have helped the industry meet MLR minimums. The requirement also delivers its biggest impact on individual and small-group coverage, which are often smaller parts of an insurance company's business.
Fear of the unknown also played a role in stirring worry about this rule, said Les Funtleyder, health care portfolio manager for Miller Tabak. Investors and analysts weren't sure how it would affect insurers.
"It was hard to quantify ... and now we've gotten some experience with it, and it turns out to not be as bad as the worst case would have suggested," he said.
Gupte noted that dividends are a fixed commitment, so insurers must be feeling "pretty comfortable" about the impact of MLR rebates and confident in their future cash flow generation.
Insurers have been helped in part over the past few quarters by health care use that has grown at a slower-than-expected rate as the economy recovers from a deep recession. Companies also have avoided competing too intensely on price, which leads to lower premiums and thinner profit margins.
UnitedHealth said the dividend will be paid June 21 to shareholders of record June 7. It said Wednesday its board also authorized the repurchase of up to 110 million shares, worth about $5.3 billion at the current stock price. That replaces a previous buyback authorization from February 2010 for 120 million shares. About 28 million shares were left under that plan.
Shares of UnitedHealth fell 5 cents to $47.91 in afternoon trading.