* Q4 EPS ex-items 63 cents vs 62-cent Wall St view
* Sees 2011 EPS $3.70-$3.80; Wall St view $3.27
* To pay quarterly dividend of 15 cents/shr
* Dividend was 4 cents annually
* Shares up as much as 14.5 percent (Adds analyst comment, further industry share performance)
NEW YORK, Feb 4 (Reuters) - Health insurer Aetna Inc (AET.N) forecast 2011 earnings at least 13 percent above Wall Street's target on Friday and dramatically increased its dividend to the highest in the industry, sending its shares up as much as 14.5 percent.
Fueled by operating cost cuts and share buybacks, the No. 3 U.S. health insurer is projecting higher earnings per share this year, after rivals such as UnitedHealth Group Inc (UNH.N) and Humana Inc (HUM.N) braced the market for at least the possibility of declines in 2011.
"They're the first managed care company to guide up" for 2011, said David Heupel, a portfolio manager with Thrivent Investment Management, which holds Aetna shares. "It's a very surprising turn of events."
Health insurer shares have outpaced the broader market so far this year as investors have become more comfortable with the fallout from the new healthcare reform overhaul. Some analysts describe the forecasts from other insurers as conservative and expect the group's shares to continue to outperform in 2011.
"The overall take is that reform is not as bad as everybody has been fearing and there are ways to mitigate the headwinds from reform and enjoy nice year-over-year EPS growth," Sanford Bernstein analyst Ana Gupte said.
Aetna, which also posted a slightly higher-than-expected quarterly profit, forecast 2011 operating earnings, excluding items, of $3.70 per share to $3.80 per share. Analysts were looking for $3.27.
Aetna's forecast equates to slightly higher operating earnings per share in 2011 than the $3.68 per share it reported for 2010.
Aetna said moves to lower operating costs, changes to its pension plan and a lower share count from share buybacks are helping 2011 per-share results. The cost cuts and pension plan changes are specific benefits that separate Aetna from its peers, said Susquehanna Financial Group analyst Chris Rigg, as is a new pharmacy benefit outsourcing deal with CVS Caremark Corp (CVS.N).
Those positive factors are countering projected drops in membership and investment income, among other negative pressures.
The industry faces new spending rules this year from the healthcare overhaul law that may cut into profits and is factoring in a rebound in the use of medical services, after Americans avoided procedures in 2010 to save money.
"The caution is that it's still a very difficult economy; employers have a lot of cost pressure; you're never exactly sure about a resurgence in utilization," Aetna Chief Financial Officer Joseph Zubretsky said in an interview.
Even before Friday, shares of health insurers had outperformed the broader market as the companies also reported strong results for 2010. The Morgan Stanley Healthcare Payor index .HMO is up nearly 14 percent this year versus a 4 percent rise for the Standard & Poor's 500 index .SPX.
With regard to the new U.S. rules, Zubretsky said: "We think we have our arms around them and know how they'll emerge financially, but there's risk to that as well."
Aetna shares were up $3.12, or 9.4 percent, to $36.39 in afternoon trading on the New York Stock Exchange, after climbing as high as $38.08 earlier in the session -- their highest level in more than two years.
Shares of rival insurers were mixed after Aetna's report. UnitedHealth shares were off 0.8 percent, while shares of WellPoint Inc WLP.N were up 1.3 percent.
INDUSTRY'S HIGHEST DIVIDEND
Aetna said it increased its cash dividend to 15 cents per share per quarter, equating to an annual payout of 60 cents -- up substantially from its previous payout of 4 cents per year.
The move follows a similarly sharp dividend increase from UnitedHealth last year [ID:nN26188186]. Wall Street has speculated that the largest insurers could return more cash to shareholders.
Citigroup analyst Carl McDonald noted Aetna's dividend yield of 1.8 percent was slightly better than UnitedHealth's 1.2 percent yield. McDonald said he expects WellPoint to institute a dividend yield of 2 percent later this month.
"Aetna now has the highest dividend in the managed care sector, and should attract long-only money from dividend only funds and spark multiple expansion," Gupte said in a research note.
Despite the new use for the company's capital, Zubretsky said the higher dividend will "not inhibit in any way our ability to execute M&A."
Aetna said fourth-quarter profit rose 30 percent to $215.6 million, or 53 cents per share, from $165.9 million, or 38 cents per share, a year earlier.
Excluding items, earnings of 63 cents per share topped analysts' estimates by 1 cent, according to Thomson Reuters I/B/E/S.
Revenue slipped more than 2 percent to $8.54 billion.
Rival health insurers have beaten analyst forecasts more significantly for the fourth quarter. Wells Fargo analyst Peter Costa said he suspected Aetna decided to boost operating expenses in the quarter as the company repositions under new Chief Executive Officer Mark Bertolini and for the new pharmacy benefit deal with CVS Caremark.
Bertolini, who ascended to the CEO job at the end of last year, wants to diversify the health insurer into information technology and international markets. (Reporting by Lewis Krauskopf; Editing by Gerald E. McCormick, Dave Zimmerman)