WellPoint, other insurers' stock buybacks concern investors

October 12, 2010

Indianapolis-based WellPoint Inc. and competing U.S. health insurers approved $10 billion in stock repurchases in the past year, a concern to investors who say buybacks failed to increase share prices and who want more spent on dividends.

The companies seek to boost stocks hurt by the health care law Congress passed in March as low interest rates for cash investments limit their options, said Brian Wright, a Collins Stewart LLC analyst. Nine health plans, led by WellPoint and UnitedHealth Group Inc., accounted for about 20 percent of cash authorized for health industry buybacks in the past year, data compiled by Bloomberg show.

WellPoint, UnitedHealth and Aetna Inc.—the three biggest plans by enrollment—have repurchased $51 billion in stock since 2004. The buybacks have disappointed investors who consider dividends a better investment, said Jeff Fahrenbruch, an analyst at Barrow Hanley Mewhinney & Strauss, a Dallas-based money manager with more than 23 million UnitedHealth and WellPoint shares.

The strategy has been “a colossal misjudgment,” said Leon Cooperman, chairman of New York-based Omega Advisors Inc., a holder of at least 1.5 million shares of each plan as of June 30. “They’re saying they know with a high degree of confidence that this is the best choice for shareholders and they couldn’t be more wrong.”

The buybacks haven’t paid off over time, Cooperman said. Since 2004, WellPoint has bought back almost $20 billion in stock at an average price of $64.92; UnitedHealth repurchased about $21 billion at an average $41.15 a share; and Aetna, $10.2 billion at an average $45.95, Cooperman said, citing company filings. Each stock now sells for less than the average the companies paid, he said.

WellPoint rose 38 cents, or less than 1 percent, to $55.39 in New York Stock Exchange composite trading Monday—a 14 percent decline since March 30, when President Barack Obama signed the health overhaul into law. Aetna climbed 21 cents, also less than 1 percent, to $30.90 Monday for a 13 percent slide since March 30. The Standard & Poor’s 500 Index has fallen less than 1 percent in that time.

UnitedHealth increased 30 cents to $34.65 Monday, for a gain of 4.8 percent since the bill signing, after boosting its dividend and raising its 2010 profit forecast.

WellPoint pays no annual dividend, while Minnetonka, Minn.-based UnitedHealth increased its offering to 50 cents a share from 3 cents in June. Aetna, based in Hartford, Conn., pays 4 cents a share. WellPoint is the biggest health insurer by membership.

“Our shareholders are supportive of a balanced model” that buoys shares, saves for acquisitions and pays dividends, John Penshorn, UnitedHealth’s senior vice president for investor relations, said in a telephone interview. “When we look at our intrinsic value, it appears to management and the board that our shares are a good value.”

Amerigroup Corp. announced the latest buyback in a statement Sept. 15. The Virginia Beach, Va,-based insurer, which focuses on low-income enrollees, doubled an existing repurchasing plan to $400 million.

UnitedHealth authorized a repurchase that may exceed $4 billion in February, after WellPoint announced a $3.5 billion program the prior month, according to data compiled by Bloomberg. Aetna announced a $1 billion buyback in July, while Humana Inc. of Louisville, Ky., said in December it plans to buy $250 million of shares.

Cigna Corp., based in Philadelphia, has repurchased $200 million this year, its then-chief financial officer, Annmarie Hagan, told analysts on an Aug. 5 call. Healthspring Inc. of Franklin, Tenn.; Universal American Financial Corp. of Rye Brook, N.Y.; and Health Net Inc. of Woodland Hills, Calif., also announced buybacks over the past 12 months.

The nine insurers still had $18.6 billion in cash and short-term investments as of June 30 for future acquisitions or repurchases, according to data compiled by Bloomberg. The $10 billion authorized in the past 12 months was up from $750 million the prior 12 months and the highest total in four years, according to Bloomberg data.

Insurers can afford the buybacks, and their shares are likely to rise as lawmakers make changes to the overhaul that blunt its impact, said Wright, the Collins Stewart analyst in New York. While the law may add 32 million to the ranks of the insured, it calls for $200 billion in taxes and funding cuts for the industry in the next decade, along with more regulation of health-plan premiums and spending.

“We’re seeing buybacks caused by low returns on investments and lower stock prices because of uncertainty about health-care reform,” Wright said. That may not change until the overhaul’s effect is clearer, he said.

WellPoint and UnitedHealth should offer more to investors in dividends rather than repurchases, Cooperman said.

“I like a stock repurchase when it’s practiced by companies that have done the analysis correctly that their stock is materially mispriced,” Cooperman said by phone.

UnitedHealth reported $4.89 billion in free cash flow last year, a measure of cash generated from operations minus capital expenditures. WellPoint produced $2.66 billion in free cash.

WellPoint has cut shares outstanding by a third in the past three years, to about 400 million, Chief Financial Officer Wayne DeVeydt told investors at a Sept. 13 conference. The company still expects to have $2.5 billion in cash by the end of 2010, and its board is considering whether to add a dividend, he said.

“We’ve been able to return a lot of value for shareholders,” DeVeydt said.

The company declined to discuss the dividend further before its Nov. 3 earnings report, WellPoint spokeswoman Kristin Binns said in an e-mail.

WellPoint should offer shareholders a dividend and UnitedHealth could afford to double its payment with the cash it produces, said Barrow Hanley’s Fahrenbruch.

Like other companies, insurers tend to repurchase when they’re flush with cash, said Fahrenbruch. That’s when their stock is likely to be most expensive, making it less of a bargain, he said. By contrast, many shareholders may automatically reinvest quarterly dividends in stocks, spreading purchases over a longer period that averages high and low prices, he said.

In the past five years, UnitedHealth has returned 70 percent of cash it generates to investors through dividends and buybacks, said Penshorn, the investor-relations chief. It has also expanded the company through acquisitions, he said.

The company aims for “a balance of investing in the business and a return to shareholders and that return should be balanced with repurchases and dividends,” he said.

Since 1997, UnitedHealth has bought 1.2 billion shares for an average $24 while issuing stock at higher prices, Penshorn said. Its dividend is a “respectable, initial” offering that may be revisited, he said.

Aetna is focused on “providing an attractive return on equity” for shareholders amid a slower economy and the health- care overhaul, Fred Laberge, a spokesman, said in an e-mail.

“We understand these conditions have had an impact on current valuations,” he said. “But we believe in our strategy and we continue to focus on the fundamentals of our business in order to produce good results, which should ultimately be reflected in the share price.”


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