NEW YORK (Reuters) - Humana Inc (HUM.N) instituted a dividend and gave a rosier view for 2011 profits, the latest sign of improving prospects for the health insurance industry after a U.S. healthcare overhaul passed last year.
Humana’s shares jumped as much as 7 percent after the company said on Tuesday that first-quarter earnings would be well above its previous forecast, raised its full-year profit outlook and increased its stock buyback plans.
Known best for being a provider of Medicare plans for the elderly, Humana is benefiting from continued low use of medical services by Americans wary of spending in the shaky economy.
The trend helped the industry’s results throughout 2010. Rival UnitedHealth Group (UNH.N) cited low utilization as a factor boosting its first-quarter results.
Shares of Humana and other health insurers are also trading at multiyear highs as investors shed fears that new U.S. regulations would severely restrict the industry’s profits.
Insurers themselves are projecting more confidence. Humana follows rivals such as UnitedHealth Group Inc and WellPoint Inc WLP.N in starting dividends or significantly increasing their payouts.
“It would signal that the big cloud from (Washington) D.C. has passed and they feel like they are going to not only survive but also have a promising future,” Sanford Bernstein analyst Ana Gupte said.
Unlike its rivals, Humana’s dividend decision caught Wall Street off guard. Humana’s chief executive indicated to Reuters just last month he was not interested in a payout to shareholders.
Initiating dividends “tend to be the behaviors of non-growth companies. I still consider us a pretty significant growth company,” CEO Mike McCallister told Reuters.
Humana said it expects first-quarter earnings of $1.86 per share, ahead of its previous forecast of $1.15 to $1.20.
The Louisville, Kentucky-based company said it was able to recognize untapped reserves that were set aside to cover medical claims in prior quarters, but otherwise gave few details.
It is due to report quarterly results on May 2. WellPoint and Aetna Inc (AET.N) are due to report later this week.
Humana increased its forecast for full-year profit to a range of $6.70 to $6.90 per share, up from $5.95 to $6.15. The new forecast represents growth of about 4 percent to 7 percent, from 2010 earnings of $6.47 per share, as opposed to its previous expectation of a decline this year.
Its board set a quarterly cash dividend of 25 cents per share, payable July 28. On an annual basis, the payout represents a yield of nearly 1.4 percent based on Monday’s closing stock price.
That compares with yields of 1 percent for UnitedHealth, 1.4 percent for WellPoint and 1.5 percent for Aetna.
Humana’s board also authorized share buybacks of up to $1 billion by June 2013, replacing its prior plans of up to $250 million.
The decision to commit more cash to dividends and buyouts may limit Humana’s ability to make acquisitions. It recently bought clinic operator Concentra for $790 million, a deal that led the company into the business of providing care.
“It does seem at least to be a signal that they are going to pursue direct physician ownership at a measured pace,” said Jefferies & Co analyst David Windley. “It reduces their dry powder.”
The company also said it will realign its business units to better reflect its business model. It will manage and report operating results using three main segments, covering individual plans such as those under Medicare Advantage, plans sold to employers, and health services like those offered by Concentra.
“They are viewed as a government player and a Medicare Advantage player, but their capabilities in consumer marketing, distribution and servicing are distinctive, and so that really is something that they need to emphasize,” Gupte said.
Humana shares rose 5 percent to $76.29 on the New York Stock Exchange, off an earlier high of $77.80.
Editing by Matthew Lewis and Maureen Bavdek