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U.S health insurer Aetna Inc. (AET - Analyst Report) 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 share buybacks.

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. (UNH - Analyst Report), WellPoint Inc. (WLP - Analyst Report) and Humana Inc. (HUM - Analyst Report) 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 companies.

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.
 

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