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In an effort to share more profit with its shareholders, U.S. health insurer, Aetna Inc. (AET - Analyst Report) announced a hike of 12.5% in its quarterly cash dividend to 22.5 cents per share. The increased dividend will be paid on Jan 31, 2014 to shareholders of record as of Jan16, 2014.

Aetna commenced paying dividend in 2001, and maintained a steady annual dividend of 40 cents per share for a decade. Thereafter, the company has been increasing shareholders’ dividend for the past three years.  It has increased its dividend at a 4-year CAGR of 118%.

The dividend hike is supported by Aetna’s strong balance sheet with debt lying within its targeted range and its continued ability to generate significant cash flows. As of Sep 30, the company had a debt to total capitalization ratio of 38%. The company expects excess parent company cash projection for 2013 to approximate $1.25 billion.

Moreover, Aetna has a low payout ratio, which leaves a lot of room for the company to increase its payout in the future.Aetna’s annual dividend yield is 1.36%, close to the industry dividend yield of 1.39% per share.

For the first nine months of 2013, Aetna returned nearly $1.2 billion of capital to its shareholders through share buyback and dividend payments.

This increase in Aetna’s dividend reflects the long-term prospects of the company’s business and its commitment to providing value to its shareholders. Through this dividend payout, Aetna will also be able to attract investors who seek a refuge from historically low yields on treasury bonds. Such investors are increasingly searching for high-quality dividend paying stocks as a means to boost their income.

Earlier during Jun 2013, health insurers UnitedHealth Group Inc. (UNH - Analyst Report) instituted a 32% hike in its quarterly dividend payment and prior to that in Feb 2013 WellPoint Inc. (WLP - Analyst Report) made a similar move by pulling up its quarterly dividend by 30%.

Aetna carries a Zacks Rank #3 (Hold). A better ranked stock – Centene Corp. (CNC - Snapshot Report) with Zacks Rank #2 (Buy) is worth considering.

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