Is WellPoint's Dividend Safe?

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WellPoint (NYSE: WLP) is one of the nation's biggest healthcare insurers, providing healthcare insurance to nearly 37 million Americans. As a result, WellPoint is often included in dividend investor's …

WellPoint (NYSE: WLP) is one of the nation's biggest healthcare insurers, providing healthcare insurance to nearly 37 million Americans. As a result, WellPoint is often included in dividend investor's portfolios.Big insurers such as WellPoint, UnitedHealthcare (NYSE: UNH), and Aetna (NYSE: AET) offer investors predictable dividend-friendly revenue regardless of the economy's whims and whispers. But investors are correct to wonder if WellPoint's dividend can be sustained in light of Obamacare regulation and soaring medical costs.In the following slideshow you'll see whether I think WellPoint's dividend is safe and gain insight into how WellPoint's dividend payout matches up with industry peers UnitedHealthcare and Aetna.

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  • 1. Is WellPoint’s Dividend Safe?
  • 2. Is WellPoint’s Dividend Safe? 2 big and important question hangs over WellPoint’s dividend: • Will adding new insurance members through healthcare exchanges erode margin? •WellPoint participates in the exchanges in fourteen states. •The company estimates 600,000 people signed up for its plans through exchanges in the first quarter. • Will costs of care tied to more expensive medicine erase profit? •Overall drug spending in the U.S. grew 5.4% in 2013, according to Express Scripts. •Spending on specialty drugs jumped 14.1% in 2013.
  • 3. Will reform reduce margin? There’s little question that the addition of hundreds of thousands of new members will benefit WellPoint’s top line. •WellPoint expects revenue will climb from $70 billion last year to $73 billion in 2014 However, the cost of caring for those members could reduce profitability, especially if fewer healthy, young people sign up for insurance. So far, WellPoint appears comfortable with the composition of new ACA members based on these comments from WellPoint’s CEO Joe Swedish during the company’s first quarter earnings conference call: “The general characteristics of applicants, including average age, are tracking well versus our expectations.” “We did notice the average age of applicants decreasing the further we got into the open enrollment period indicating that younger age applicants signed up later in the period.”
  • 4. Will reform reduce margin? Nonetheless, operating margin at WellPoint’s commercial business sank in the first quarter from 12.8% last year to 9.1% this year. That offset a 1.6% improvement in operating margin for its Government business, which grew by 120,000 Medicaid members in the quarter thanks to Medicaid expansion. Overall, WellPoint’s operating margin has fallen to 5.2% and remains below its peers UnitedHealthcare and Aetna, which boast operating margin north of 7%.
  • 5. Will soaring prices for medicines curb profit? The FDA approval of ultra-high priced medicine such as Gilead’s hepatitis C drug Sovaldi has insurers scrambling. •Gilead’s Sovaldi costs $84,000 and there are 3.2 million living with chronic HCV in the U.S. •Spending on hepatitis C drugs by insurers is expected to climb 102% in 2014 and 208% in 2015. •WellPoint expects to spend an incremental $100 million on hepatitis C treatment between the second and fourth quarter as use climbs. The approval of high priced autoimmune and oncology drugs is expected to contribute to average spending growth for specialty medicine of 17% in 2014 and 18% in 2015, according to Express Scripts 2013 Drug Trend Report. •The National Cancer Institute estimates spending on breast cancer alone could climb from $16.5 billion in 2010 to as much as $25 billion in 2020.
  • 6. Will soaring prices for medicine curb profit? Despite that headwind, WellPoint appears comfortable in its 2014 earnings forecast, increasing projections from at least $8 per share exiting the fourth quarter to at least $8.40 per share exiting the first quarter. Analysts are similarly optimistic, with estimates suggesting earnings will accelerate to more than $12 per share in 2017.
  • 7. Is there room for dividend growth? WellPoint’s cash dividend payout ratio, which measures how much cash is being spent on dividends after paying for capital expenses and preferred dividends, is healthy at just 16%. UnitedHealthcare’s payout is a bit higher, and Aetna’s is a bit lower, but levels at all three companies suggest there’s room for dividends to grow.
  • 8. How does the dividend yield stack up? WellPoint’s dividend yield is 1.6%, which is nicely higher than competitor Aetna, but trails UnitedHealthcare. It seems that reform hasn’t derailed WellPoint’s ability to grow earnings and that rising costs of care are being adequately priced into premiums. Given that backdrop, WellPoint’s dividend appears safe.
  • 9. The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.