Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low, it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Check out last week's selection.
This week I want to stick with the theme of health care and move over to the insurance side of things, where I can highlight WellPoint (ELV 0.15%).
The Obamacare-ocalypse?
There are a lot of reasons why investors aren't happy with health plan solutions provider WellPoint at the moment. For one, WellPoint had reported five consecutive quarterly declines in profit, which was only recently ended with its third-quarter report. Even with that streak having ended, the company -- which focuses very heavily on individual and small-business insurance plans -- witnessed a 2% decline in total enrollment to 33.5 million as competition among its peers grew.
Even more worrisome for WellPoint investors is how the company will react to the implementation of the Affordable Care Act in 2014. The ACA, which will expand Medicaid coverage to an additional 16 million people, will place restrictions on the fees and premiums that WellPoint will be able to impose, will require a certain amount of patient premiums be spent on their care, and will disallow insurers like WellPoint from turning away patients with costly preexisting conditions. The ACA is seen as a boon to very few insurers, actually, with Medicaid-based solution providers like Molina Healthcare (MOH 1.15%) seeing the bulk of analyst optimism.
Thinking proactively, not reactively
Clearly, I can see why investors are concerned, and I do understand many of these points. But there are plenty of reasons to be excited about the value and future that WellPoint offers investors.
Understanding that the expansion of the government-run Medicaid program will present a huge opportunity, WellPoint ponied up $4.46 billion to acquire AMERIGROUP (AGP) and nearly double the number of Medicaid-sponsored participants under its plans. With coverage expected to grow to 19 states, WellPoint will be one of the largest Medicaid plan providers behind only UnitedHealth Group (UNH 0.23%) and will be utilizing these patients to help keep its own costs down. Furthermore, the move will better position WellPoint to take advantage of the roughly 9 million people who are dual-eligible patients and qualify for both Medicare and Medicaid.
The scope of the ACA is also largely unknown, and the oversights put into place may not be enough to keep premium costs from rising further. Case in point: Aetna (AET) recently boosted premium prices in some states by as much as 21%, proving that HMOs still rule the roost when it comes to plan pricing. Although regulators will be put in place to question unwarranted premium hikes, pricing will ultimately lie with insurers like Aetna and WellPoint.
Valuation is another selling point for WellPoint. You would think that WellPoint was set to lose a third of its plan participants and that it was about to be left in the dust by its peers based on it trading at just 73% of book value and seven times forward earnings. In actuality, WellPoint is cash rich and trading at a significant discount to both UnitedHealth Group and Aetna based on P/E, all while positioning itself to take advantage of the ACA in 2014.
It's all about the Benjamins
But if you really need another reason to be excited about WellPoint, I'll direct you to the company's dividend, which was only instituted last year.
You might be thinking, "OK, how exactly do you call WellPoint a dividend you count on if it's only been paying a quarterly stipend for seven quarters?" The answer to that is simple: It's overflowing with positive free cash flow!
WellPoint already boosted its quarterly payout once this year by 15% to $0.2875, and its payout ratio is just a minuscule 15.5% of expected full-year earnings in 2012. What this means for shareholders is a strong likelihood that WellPoint will focus on rewarding shareholders through dividend increases and that these increases will be easily sustainable based on the company's solid cash flow.
Foolish roundup
Ultimately, what we need to remember is that these insurers are in business to make money. Regardless of what obstacles are placed in the path of health-plan insurers, they've always overcome them. The ACA will obviously present challenges for WellPoint, but I don't see premium caps or margin constraints holding this company back from producing near-record profits in 2014. With a yield of 2% and a focus on returning profits back to shareholders, I see WellPoint as a company you can definitely count on to deliver for many years to come.
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