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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 14.3% in its quarterly cash dividend to 20 cents per share. The increased dividend will be paid on January 25, 2012 to the shareholders of record as of January 10, 2012.

Aetna commenced paying dividend in 2001, and maintained a steady dividend of 40 cents per share till 2010. However, the company has been increasing shareholders’ return for the past couple of years.  

The dividend hike is supported by Aetna’s strong balance sheet with a moderate leverage and its ability to generate significant cash flows. The company guided a deployable capital of $1.55 billion for 2012. 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 will increase to 1.85%, up from the 1.6%.  Its peers WellPoint Inc. (WLP - Analyst Report), UnitedHealth Inc. (UNH - Analyst Report) and CIGNA Corp. (CI - Analyst Report) are carrying dividend yields of 2.10%, 1.60% and 0.10% respectively.

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 are seeking refuge from historically low yields on treasury bonds. These investors are increasingly searching for high-quality dividend paying stocks as a way to boost their income

For the recently closed quarter, Aetna reported earnings of $1.55 per share, way ahead of the Zacks Consensus Estimate of $1.34 per share and up 11% year over year.  Revenue growth, higher underwriting margins, increased membership, and lower operating costs drove the improvement. Following the better-than-expected performance,

Aetna raised its 2012 earnings expectation to $5.10 from the earlier guidance range of $5.00–$5.10 per share. The Zacks Consensus Estimate for 2012 of $5.15 is above the company’s guidance.

In our viewpoint, a strong balance sheet, moderate debt capital and significant free cash flow generation will help Aetna pay attractive dividends on a regular basis in the future as well.  Share repurchase activity will further add to the company’s shareholders’ returns.

There was no earnings momentum over the last 30 days. We believe the news to share more profits with shareholders might encourage analysts to raise their estimates, providing an upward directional pressure on its Zacks Rank.

Aetna currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we are also maintaining our long-term Neutral recommendation on the shares.

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