Big insurers reward investors with dividend boosts

Some of the nation's largest health plans are giving their investors a little financial salve to soothe any worries that health system reform -- particularly a requirement that insurers spend a mandated minimum percentage of their premium dollars on care -- would hurt company profits and share prices.

WellPoint has announced it will pay a $1 per-share dividend in 2011, 25 cents each quarter. Cigna has announced a 4-cent-per-share dividend for the first quarter of 2011, a total equal to the dividend it paid for all of 2010. Aetna's announced 15-cent-per-share dividend for the first quarter of 2011 -- a dividend it pledged to pay every quarter of the year -- is 1 cent short of what it paid out in per-share dividends for the previous four years combined.

And UnitedHealth Group, which ratcheted its per-share dividend up to 41 cents in 2010 from three cents in 2009, is on pace to beat its number from last year. The company announced a 13-cent-per-share dividend for the first quarter of 2011, which at that pace would result in a 52-cent-per-share dividend over the course of the year.

Douglas Skinner, PhD, professor of accounting at the Booth School of Business at the University of Chicago, is an expert in corporate payout policies. Because companies rarely begin paying a regular dividend and then stop or reduce the dividend amount, he said, paying dividends is like a pledge to shareholders signaling that management believes the company will profit in the long term.

So why start, or increase, dividends in 2011? Because as of Jan. 1, under the Patient Protection and Affordable Care Act, plans are required to spend at least 80% of the premiums they collect for individual and small-group policies, and 85% of what they collect for large-group plans, on patient care and quality improvement.

In recent years, many plans have spent less than those percentages. But health insurers have been trying to assure investors that despite more medical spending, profits will remain strong. For some plans, a dividend, which is paid out of earnings, is putting their money with their mouths are.

"In an environment where our job is to return -- to provide a return on capital, return on equity for all of you, in an environment where the margin in that equation is being more highly regulated -- it's incumbent upon us to work the denominator a lot harder. So you'll see us working the capital structure harder to provide the returns that are attractive to investors," Aetna Chief Financial Officer Joe Zubretsky said at a September 2010 investors conference, foreshadowing his company's decision to boost dividends.

Weeks after Aetna boosted its dividend, Indianapolis-based WellPoint announced Feb. 23 that it will pay dividends in 2011 for the first time.

"The declaration of a dividend by our board is a testament to their confidence in our strategy, future growth outlook and cash flow," WellPoint President and Chief Executive Officer Angela Braly said in a news release.

At a March 1 investor conference, WellPoint Chief Financial Office Wayne DeVeydt said the company expects the new medical-loss ratio rules to cost the firm about $300 million in 2011.

That's a small slice of WellPoint's profits, which were $2.8 billion for 2010. But the company expects to make a profit of at least $3.8 billion for 2011, because health reform is creating business for WellPoint and other insurers, which have seen commercial membership drop because of job cuts at client companies and rising premium prices. By 2014, Americans will be required to buy insurance or face a penalty.

"The only thing shrinking here, ultimately, is the uninsured ranks," DeVeydt said. "So health reform is actually creating an opportunity for growth that didn't exist before."

Paying dividends is a confidence-booster for investors that doesn't cost all that much, analysts said. For example, United's 41-cents-per-share dividend cost it $449 million. But that was only 9.6% of its net income of more than $4.6 billion.

After Aetna announced its 2011 dividend plan, BMO Capital Markets investment analyst Dave Shove raised the price projections for its stock and noted, "We believe this target may prove low as concern over political change dissipates."

Dividends are part of a two-pronged strategy some health plans have for boosting share prices. (Coventry Health Care, Health Net and Humana have announced no plans to pay dividends.) In 2010, the seven largest publicly traded health plans (except Coventry) spent a collective $8.9 billion to buy back shares of stock, up from $5.2 billion in 2009. Buying back shares makes existing stock more valuable, because there is less of it to trade.

Skinner said there's a reason that shareholders -- and not physicians -- will see the rewards of health plans' higher profits. It's because that's what shareholder-owned companies do.

Deciding to pay more for a double bypass or raising the payment for immunizing a baby would be like Toyota deciding to use profits to pay more for engine parts, he said.

"They're going to be acquiring the services at minimum cost," Skinner said. "They have a duty to shareholders to maximize share value, and that means maximizing their profits."