Now That's What I Call a Healthy Dividend Increase

UnitedHealth Group (NYSE: UNH  ) increased its dividend more than 16 fold yesterday going from a token $0.03 once a year, to $0.50 split over four payments per year. The new yield isn't at the level of some stellar dividend plays , but the increase should help woo some investors that might be a little nervous about the health of the industry after health-care reform legislation passed earlier this year.

It might also put a little pressure on the rest of the industry that's been rather stingy about handing its cash back to investors.

Company

Dividend Yield

UnitedHeath

1.75%

Aetna (NYSE: AET  )

0.1%

Humana (NYSE: HUM  )

0%

WellPoint (NYSE: WLP  )

0%

Cigna (NYSE: CI  )

0.1%

Source: Yahoo! Finance.

While the dividend hike may attract some investors, it could have the opposite effect for its customers. Fools realize the company is making the same profit and free cash flow no matter what its dividend is, but the average customer may hear about an increased dividend and assume it means the company is making more. Fortunately it's often the employer of the end user that makes the decision to buy, and they're more likely to be focused on cost, and less worried about how much UnitedHealth is making.

Returning money to investors may be the best use of UnitedHealth's cash. The company had previously used the cash it generated to grow externally through acquisitions, but further consolidation in the insurance industry is likely to be frowned upon. Justified or not, areas with just a few insurers -- and therefore a lack of competition -- were the poster-child for high health-care costs during the reform movement.

And besides it's not like UnitedHealth is giving up all its cash flow; the current dividend is only expected to take up 12% to 13% of UnitedHealth's cash flow. That will still leave plenty of money to repurchase shares or expand externally, potentially in its Health Services businesses, which is in the business of lowering health-care costs -- a popular notion these days.

Nick Kapur says cash is good, but giving it to shareholders is even better.

UnitedHealth and WellPoint are Motley Fool Inside Value recommendations. UnitedHealth is a Motley Fool Stock Advisor choice. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool owns shares of UnitedHealth Group and has a disclosure policy.


Read/Post Comments (1) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 03, 2010, at 4:41 PM, WmSchick wrote:

    If, as some have suggested, the HMOs will evolve into little more than utilities, they will all start paying dividends. They certainly will never be considered growth plays again. Things change. . .

Add your comment.

DocumentId: 1194766, ~/Articles/ArticleHandler.aspx, 8/2/2014 2:18:32 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement