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Is Aetna's Dividend Safe?


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Is Aetna's Dividend Safe?

  1. 1. Is Aetna’s Dividend Safe?
  2. 2. Is Aetna’s Dividend Safe? 2 big and important question hangs over Aetna’s dividend: • Will adding new insurance members through healthcare exchanges erode margin? •Aetna participates in the exchanges in 17 states. •230,000 people signed up for Aetna’s plans through exchanges in Q1. • 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. 3. Will reform reduce margin? There’s little question that the addition of hundreds of thousands of new members will benefit Aetna’s top line. •Aetna’s first quarter revenue climbed from $13.1 billion in Q4 to $13.9 billion in Q1 thanks in part to ACA reform driven membership growth, particularly in Medicaid. •Aetna expects revenue will climb from $47.2 billion last year to $56 billion to $57 billion in 2014. •Up from projections for at least $54 billion this year exiting Q4. •Industry analysts think sales could rise to as much as $60 billion in 2015. However, the cost of caring for those members could reduce profitability, especially if fewer healthy, young people sign up for insurance coverage through exchanges.
  4. 4. Will reform reduce margin?
  5. 5. Will reform reduce margin? Despite the revenue benefit of seeing its total insured membership grow from 22.2 million people to 22.7 million people between the fourth and first quarter, Aetna’s operating margin has sank from 8.5 % to 7.6% over the past two years. Although operating margin has fallen, the acquisition of Coventry Health and rising revenue tied to reform have helped net income climb to new highs.
  6. 6. 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. • “The ever-present concern that medical cost trends could increase more than we’ve projected including but not limited to the potential for higher-than-projected utilization of new Hepatitis C treatments,” was cited as a risk in Aetna’s first quarter conference call. 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.
  7. 7. Will soaring prices for medicine curb profit? Despite that headwind, Aetna appears comfortable in its 2014 earnings forecast. It increased its 2014 EPS guidance from its prior projection for at least $6.25 to between $6.35 and $6.55 exiting the first quarter. Analysts appear even more optimistic, expecting Aetna’s earnings to accelerate to nearly $9 per share in 2017.
  8. 8. Is there room for dividend growth? Aetna’s cash dividend payout ratio, which measures how much cash is being spent on dividends after paying for capital expenses and preferred dividends, is very healthy at just 11%. That puts it in better shape for future dividend increases than peers WellPoint and UnitedHealth, but…
  9. 9. How does the dividend yield stack up? Aetna’s dividend yield is fairly anemic at just 1.1%. That’s significantly lower than UnitedHealth, which just increased its dividend by 34%, and solidly below WellPoint’s 1.6% yield. Instead, Aetna appears more committed to buybacks given that it repurchased $465 million in shares in Q1 and $1.4 billion in shares in 2013. Given that backdrop, it would seem that while there’s plenty of room to boost the dividend, dividend investors may find UnitedHealth and WellPoint more accommodating.
  10. 10. 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.