Aetna Inc. (NYSE:AET), which is one of the major players in the healthcare
insurance industry in the US, recently announced a 12.5% rise in its quarterly
dividend and has maintained its guidance for 2014. However, the company has
conceded that the rising costs of Medicare due to the effects of Obamacare will
have a negative impact on the company's earnings.
On the other hand, the
company has been investing substantially in foreign shores, and this has
started to bear fruit. Further, the company retains a justifiable confidence in
its balance sheet. This coupled with its smart international moves, is expected
to help the company's growth potential going forward.
Aetna's recent announcements
AET is known as a steady dividend paying stock, having maintained the $0.40 a share
annual dividend for ten years (starting 2001) and subsequently increasing its bonus
regularly. This has earned the company a 4-year CAGR of 118%. The latest hike
of 12.5% translates to a quarterly dividend of $0.22 per share, payable on Jan
31, 2014 to shareholders on record as of Jan 16.
Aetna reiterated the earlier guidance of $5.80-$5.90 per share
(excluding after-tax amortization of other acquired intangible assets) for the whole
of 2013 while stating that it expects operating revenue to be $47 billion for
the whole of 2013. Regarding 2014, however, it only gave”at least"
earnings of $6.25, stating that the uncertainty over business prospects due to
the mandates of the ACA, which will become effective in 2014. It also lowered
its expected operating revenue to $53 billion, which is slightly below
analysts' consensus estimate of $55 billion.
The shadow of Obamacare
Aetna's concerns are shared across the industry since ACA will have
serious implications for healthcare companies. Firstly, it will not allow
companies to deny healthcare plans to those with pre-existing conditions, and
companies fear that this will lead to those who were denied lining up to get
insurance, leading to a manifold increase in risk. Additionally, the need to
compete with in state insurance exchanges has raised risk factors and caused
the company to withdraw from the private individual health insurance space in
Maryland.
Decent overseas performance
Aetna has been expanding aggressively in the international market, acquiring
insurance specialist InterGlobal in. InterGlobal has a strong presence in
Africa, Asia and Pacific, Middle East and Europe and will provide Aetna with
65,000 members. It also announced in May that the company will form an alliance
with Tawuniya in Saudi Arabia to grow in the region. At present, Aetna is the
second largest insurance provider in terms of exposure to the international
market, carrying out effective business in 30 countries. Considering the fact
that the global market has been growing steadily over the past few years and is
expected to continue on the same path, these moves will certainly help Aetna in
the long-run.
A look at the balance sheet
Aetna's payout ratio, even after the recent hike, stands at 15.60%, while yield is
1.36%. Both are relatively low (though yield is on par with the industry standard of
1.39%), and this allows the company to raise its payout regularly. This helps
the company attract those who wish to move away from the low yields of treasury
bonds to solid dividend paying stocks.
The company has significant cash flows and a debt to total
capitalization ratio of 38%. Coupled with its low payout ratio, these make
Aetna's balance sheet look pretty solid.
The investor's decision
Aetna is not invincible to the headwinds blowing from Obamacare, nor is
it pretending to be so. The company has invested wisely in overseas
acquisitions while trying to reduce the exposure in US states. These will help
the company offset the potential risks from ACA. Further, it should be able to
keep up the dividend increases considering the growth prospects and balance
sheet figures. As such, investors who have already invested in the company's stock
are advised to "hold" while those who are yet to take the plunge
would be advised to "buy" a limited amount of the company's stock for
the time being.
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