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Aetna, Inc. (AET) is one of the most active health insurance companies in the US. The company operates in three segments. Its Health Care division offers HMOs, PPOs, point-of-service [POS] plans, health savings accounts, and traditional indemnity coverage, along with dental, vision, behavioral health, and Medicare plans. Aetna covers more than 15 million individuals under its health plans, some 13 million dental plan members, and 10 million pharmacy members. Its Group Insurance segment sells life, disability, and long-term care insurance, covering about 15 million people. The Large Case Pensions segment offers pensions, annuities, and other retirement savings products.

This company was born again in December of 2000 when it sold the Financial Services division and international businesses to ING Groep and focused its efforts on health-care. That focus has paid off. When the divisions were sold, each shareholder of the old company, Aetna Life and Casualty, received $35.33 in cash and one share of the new Aetna. It's that one share that has made a difference.

Going from a low of $5.80 in 2001 (price adjusted for 2 stock splits, one in 2005 (2 for 1) and one in 2006 (2 for 1)), the stock has climbed almost continuously to its recent all time high of $53.40. The reason for the stellar performance? Let's say it all together: earnings, earnings, and earnings.

In 2004, they were $1.76 a share, then went to $2.23, followed by $2.82. This year look for $3.35 and $3.70 next year. Over the next 5 years, analysts predict earnings will grow, on average, 15% a year while revenues improve by 11% a year, on average. Revenues were $25.15 billion last year, with expectations of $25.55 billion this year and $30 billion next year.

This is a big company. Market cap is $26.5 billion. Revenues will reach $30 billion in a year. There are 512.3 million shares outstanding. There's $14.82 billion in cash in the treasury, putting the current assets over 2 times the current liabilities.

The company has an aggressive stock repurchase program. In the March quarter alone it spent $300 million to buy back 6.8 million shares. The board recently authorized another $750 million to buy more shares. That's on top of the $270 million still waiting to be spent from a previous approval.

Aetna has seen good growth, thanks to higher premiums and rate increases as well as adding new members. Cutting expenses has been a priority, adding to the bottom line. Look for a new addition this year in the form of Schaller Anderson, a company providing healthcare management services for Medicaid plans. It also manages self-funded health plans and behavioral health services. It's especially strong in the southwest, a geographic region Aetna has targeted as a growth opportunity. The deal will cost about $535 million and be funded from all that cash in the treasury. It should close in the September quarter.

Aetna provides a service everyone needs. It's expanding its products and services and cutting costs while price hikes are sticking. There is plenty of competition in this field, but Aetna seems to be able to grow its market share. Look more closely at this giant if you're interested in the health insurance industry.

The Good: Strong earnings growth, good return on equity.
The Bad: Relative high valuation.
The Beautiful: Everyone needs health insurance.

AET 1-yr chart

AET

Disclosure: none

Source: Aetna Inc.: The Giant That Keeps Growing