U.S health insurer
) announced its plans to buy an additional $1.0 billion of common
stock. This new sanction figures over and above approximately
$388 million of Aetna's existing share buyback authorization
which remains as of Feb 27, 2014.
Aetna also declared its intent to pay a quarterly cash dividend
of 22.5 cents per share on the company's common stock. The
dividend will be paid on Apr 25, 2014, to shareholders of record
at the close of business on Apr 10.
Following the announcement of the share buyback program, Aetna's
shares touched a new 52-week high of $73.86 per share on Feb 28.
On the surface, stock buybacks comprise an important part of the
insurer's capital allocation story. However, if we dig in deeper,
we may trace an altogether different motive behind such buybacks.
Share repurchases help a company to reduce the number of its
shares, thereby, increasing earnings per share instantly. In the
same vein, Aetna is now seeking to boost its earnings that have
been hurt by the healthcare law in the recent past.
It should be noted that since 2010, the company has spent $766.7
million in dividends compared with only $6.2 billion spent on
While it is claimed that buybacks signal confidence in the future
performance of a company's stock, a slightly different trend is
witnessed in the health insurance industry. Aetna is attempting
all possible means to increase its earnings in an effort to beat
the analysts' expectations. However, it is becoming increasingly
difficult for the company to maintain its top-line growth with a
number of Obamacare healthcare rules due to be implemented in
2014. While the law may add 32 million to the insured count in
the U.S. , it calls for $200 billion in taxes and funding cuts
for the industry, along with increased regulation of health-plan
premiums and spending.
This is not the case with Aetna alone. Most of the prominent
health insurers like
UnitedHealth Group Inc.
) have been on a buyback binge lately.
However, this practice by the for-profit insurers has been
criticized widely by industry advocates. It has been said that
insurers raise premiums, deny coverage to people with
pre-existing conditions, put cap on lifetime benefits and in
turn, use the hefty premium earned from their policy holders on
share buybacks to increase the net worth of top insurance
executives who hold stock grants and stock options in their
Health insurers should instead augment dividend payments and fund
investments that generate better quality, and lower cost of goods
and services, rather than splurge on share buybacks.
AETNA INC-NEW (AET): Free Stock Analysis
HUMANA INC NEW (HUM): Free Stock Analysis
UNITEDHEALTH GP (UNH): Free Stock Analysis
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