Money & Company

Tracking the market and economic trends
that shape your finances.

« Previous Post | Money & Company Home | Next Post »

UnitedHealth tries to lure investors with huge dividend boost

May 26, 2010 |  5:28 pm

The healthcare insurance industry has been notoriously stingy about paying cash dividends to shareholders. That may be changing.

UnitedHealth Group Inc. on Wednesday boosted its annual dividend to 50 cents a share, a dramatic jump from the 3-cents-a-share annual payment the company has paid for the last five years.

Why such a massive increase? Wall Street suspects that UnitedHealth is trying to show investors that it expects to prosper -- or at least survive -- under federal healthcare reform.

The Minnetonka, Minn.-based company said in a statement that its board approved the new payout “after reviewing the company’s business outlook and future capital requirements.”

The 50-cents-a-share annual dividend will be paid in quarterly installments beginning with a June payment of 12.5 cents a share.

UhG_Logo UnitedHealth’s stock rose as high as $29.55 after the announcement but faded with the broad market late in the session. The shares closed down 8 cents at $28.79.

The new dividend rate gives the stock an annualized yield of 1.7% at Wednesday’s closing price. That is below the current average dividend yield of 2% for the stocks in the Standard & Poor’s 500 index. But it’s huge compared with the meager payouts of most other big healthcare insurers.

Cigna Corp. and Aetna Inc., for example, both pay per-share dividends of just 4 cents a year, for an annualized yield of 0.1% on their stocks.

Some investors may view UnitedHealth’s decision to pay out more cash as a sign that the company’s best growth days are behind it. After all, a low-dividend firm typically justifies its meager payout by asserting that shareholders will benefit more by allowing the company to reinvest most of its earnings in the business -- or to use excess cash for stock buybacks at management’s discretion.

At a point where many investors are leery of buying stocks at all, however, a decent dividend payment may give UnitedHealth an edge in pitching its shares in the marketplace.

But the move also could subject the company to attacks by consumer advocates and small businesses, who probably would favor lowered healthcare premiums over a generous dividend boost for shareholders.

UnitedHealth will be shelling out about $560 million a year to shareholders with its new dividend, compared with $34 million under the old payout.

-- Tom Petruno