Why International Growth Is Key for Healthcare Giant Aetna

Friday, January 24, 2014

Why International Growth Is Key for Healthcare Giant Aetna

Aetna Inc. (NYSE:AET), which is one of the major players in the healthcare insurance industry in the US, recently announced a 12.5% rise in its quarterly dividend and has maintained its guidance for 2014. However, the company has conceded that the rising costs of Medicare due to the effects of Obamacare will have a negative impact on the company's earnings. 
Image credit: kurhan / 123RF Stock Photo

On the other hand, the company has been investing substantially in foreign shores, and this has started to bear fruit. Further, the company retains a justifiable confidence in its balance sheet. This coupled with its smart international moves, is expected to help the company's growth potential going forward.

Aetna's recent announcements
AET is known as a steady dividend paying stock, having maintained the $0.40 a share annual dividend for ten years (starting 2001) and subsequently increasing its bonus regularly. This has earned the company a 4-year CAGR of 118%. The latest hike of 12.5% translates to a quarterly dividend of $0.22 per share, payable on Jan 31, 2014 to shareholders on record as of Jan 16.
Aetna reiterated the earlier guidance of $5.80-$5.90 per share (excluding after-tax amortization of other acquired intangible assets) for the whole of 2013 while stating that it expects operating revenue to be $47 billion for the whole of 2013. Regarding 2014, however, it only gave”at least" earnings of $6.25, stating that the uncertainty over business prospects due to the mandates of the ACA, which will become effective in 2014. It also lowered its expected operating revenue to $53 billion, which is slightly below analysts' consensus estimate of $55 billion.
The shadow of Obamacare
Aetna's concerns are shared across the industry since ACA will have serious implications for healthcare companies. Firstly, it will not allow companies to deny healthcare plans to those with pre-existing conditions, and companies fear that this will lead to those who were denied lining up to get insurance, leading to a manifold increase in risk. Additionally, the need to compete with in state insurance exchanges has raised risk factors and caused the company to withdraw from the private individual health insurance space in Maryland.
Decent overseas performance
Aetna has been expanding aggressively in the international market, acquiring insurance specialist InterGlobal in. InterGlobal has a strong presence in Africa, Asia and Pacific, Middle East and Europe and will provide Aetna with 65,000 members. It also announced in May that the company will form an alliance with Tawuniya in Saudi Arabia to grow in the region. At present, Aetna is the second largest insurance provider in terms of exposure to the international market, carrying out effective business in 30 countries. Considering the fact that the global market has been growing steadily over the past few years and is expected to continue on the same path, these moves will certainly help Aetna in the long-run.
A look at the balance sheet
Aetna's payout ratio, even after the recent hike, stands at 15.60%, while yield is 1.36%. Both are relatively low (though yield is on par with the industry standard of 1.39%), and this allows the company to raise its payout regularly. This helps the company attract those who wish to move away from the low yields of treasury bonds to solid dividend paying stocks.
The company has significant cash flows and a debt to total capitalization ratio of 38%. Coupled with its low payout ratio, these make Aetna's balance sheet look pretty solid.
The investor's decision
Aetna is not invincible to the headwinds blowing from Obamacare, nor is it pretending to be so. The company has invested wisely in overseas acquisitions while trying to reduce the exposure in US states. These will help the company offset the potential risks from ACA. Further, it should be able to keep up the dividend increases considering the growth prospects and balance sheet figures. As such, investors who have already invested in the company's stock are advised to "hold" while those who are yet to take the plunge would be advised to "buy" a limited amount of the company's stock for the time being.


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