* 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)
By Lewis Krauskopf
NEW YORK, Feb 4 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
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
Those positive factors are countering projected drops in
membership and investment income, among other negative
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
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
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
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,