Last week health insurer UnitedHealth (UNH) announced a hike in its annual dividend to 50 cents per share from a meager 3 cents per share. The increased dividend will be paid on June 21 to the shareholders of record as on June 7. Moreover, the investors will now receive dividends every quarter instead of once a year.
Minnesota based UnitedHealth has always preferred share buybacks and mergers as a way to deploy capital. Prior to this, the company had last increased its annual dividend in 2006 to 3 cents from 1.5 cents.
UnitedHealth, the biggest of the health insurers on the basis of revenues, will be returning $560 million over the next twelve months to the shareholders in the form of dividend, significantly up from an aggregate of $35 million earlier.
The dividend hike is supported by UnitedHealth’s strong balance sheet with low leverage and its ability to generate significant cash flows. The recent quarter saw a cash flow of $1.2 billion. Management has projected $4.4 billion – $4.8 billion in cash flows for the full year 2010. The dividend announced constitutes 12% –13% of the expected cash from operations.
UnitedHealth’s annual dividend yield will increase to 1.7%, significantly high from a paltry annual yield of 0.1% previously.
The move by UnitedHealth reflects the effort made to restore investors’ confidence in the company. It has been facing membership enrollment declines in commercial insurance due to increasing unemployment during 2008 and 2009. Even in the recent quarter, a 4% decline was witnessed in the number of enrollees. However, the rate of decline has moderated from the levels seen in the last year.
For the recently closed quarter, UnitedHealth reported a $1.2 billion or $1.03 per share, up 22% from $984 million or 81 cents per share last year. Revenues rose 5% to $23.19 billion from $22 billion in the same quarter of last year.
On the back of an improving economic scenario, management raised its 2010 profit expectation to $3.15 – $3.35 per share, up from the $2.90 – $3.10 per share it had projected earlier this year, with $92 billion of revenues.
We believe 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 the shareholders’ returns. However, there are potential uncertainties related to the Patient Care Protection Act.