WellPoint Inc. announced its first dividend payment on Wednesday as it became the latest health insurer to reward shareholders with a quarterly payout after piling up cash from a string of strong financial performances.
Big health insurers used to offer token dividends, if any, like the 4-cent annual one Aetna Inc. paid last November. But that started to change last year when UnitedHealth Group Inc. — the largest health insurer based on revenue — announced a quarterly dividend of 12.5 cents per share.
Indianapolis-based WellPoint said its board declared a quarterly cash dividend of 25 cents per share, payable March 25 to shareholders of record as of March 10.
Aetna said earlier this month it will now pay a 15-cent quarterly dividend on April 29 to shareholders as of April 14. That dividend offers the highest yield, 1.6 percent, of the three insurers based on Tuesday's stock closing prices.
The steady cash flow from larger dividends can make a company's stock more attractive to investors. This is especially true in the managed care sector, where investors have worried about how companies will be affected by the massive health care overhaul, which aims to cover millions of people but will impose a host of new taxes and restrictions on insurers.
"If you're providing dividends, it says maybe things are not as bad as you thought they were in terms of the new health care law," said Robert Laszewski, a former insurance executive who's now a consultant.
Health insurers are coming off strong performances in recent quarters. Many have reported better-than-expected earnings helped in part by improved pricing of their products and a slowdown in health care use. WellPoint's fourth-quarter profit easily topped Wall Street expectations, and analysts have said they expected the insurer to announce a dividend on Wednesday, when the company meets with investors in Indianapolis.
Stronger financial performances have given insurers a growing supply of cash to spend after stocking the reserves they need to keep for claims. Dividends are an option for that money, especially when there are few prospective acquisitions out there for big companies to make, said Laszewski, president of Health Policy and Strategy Associates.
Another option is share buybacks. WellPoint also said Wednesday its board also boosted the company's repurchase authorization to $1.6 billion in 2011.
One option companies probably won't take is using that excess cash to reduce premiums, even though shareholder dividend payments may invite fresh criticism of the industry. Some insurers, including WellPoint, took heat last year for jacking premiums in individual insurance markets while reporting rich profits.
Using cash to lower premiums would only be a temporary solution that does nothing to solve the underlying problem of spiraling care costs, Laszewski said. It also would delay rate increases for a year because cost increases aren't going away. The premium increase would compound and create an even bigger headache.
"Subsidizing these rates for one year would really be a stupid thing to do because you only create a much bigger problem for consumers and regulators in two years and therefore (insurers)," he said.
Also on Wednesday, WellPoint reaffirmed 2011 earnings expectations of $6.30 per share, which was originally below Wall Street forecasts. Insurers have said they expect the overhaul to have more of an impact on their performance this year, and a return to normal health care use also will pressure their profits.
WellPoint's forecast is now above the average analyst expectation of $6.56 per share, according to FactSet.