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Maintain a Healthy Portfolio with Aetna

March 24, 2014 | About:
Victor Selva

Victor Selva

9 followers

Aetna Inc. (AET) is a health care benefits company. The company has three segments: Health Care, Group Insurance, and Large Case Pensions. The company’s customers include employer groups, individuals, college students, health plans, health care providers, governmental units, government-sponsored plans, labor groups and expatriates.

Acquisitions

On May 7, 2013, Aetna acquired Coventry Health Care. The Coventry transaction enhances the core insurance business and increases the presence in the fast-growing government sector. The acquisition of Genworth’s Medicare Supplement business has also improved businesses as well as expands Aetna’s presence to states like Kansas, Missouri, New Jersey and Wisconsin. Aetna agreed to acquire Prodigy Health Group from Prodigy Health Holdings benefiting with its low-cost administrative platform. It also acquired account-based health plan administrator PayFlex, with the aim to enhance its consumer health business. Aetna made huge investments in IT and in that sense it acquired Medicity Inc., a health information exchange technology company based in Salt Lake City.

International Markets

The company plans to expand its affordable and quality health care cover internationally. Its plans to expand operations in Asian markets like India and China, both countries present huge potential growth. International business is expected to grow faster than other segments so it is crucial to reach those markets.

Returning Cash

Aetna recently announced a quarterly dividend, the Board declared a quarterly cash dividend of $0.225 per share on the company’s common stock. This represents a $0.90 annualized dividend and a dividend yield of 1.2%. Additionally, the Board authorized the company to repurchase up to an additional $1 billion of its common stock.

P/E, Earnings and ROE

In terms of valuation, the stock sells at a trailing P/E of 14.2x, trading at a discount compared to the industry. Earnings per share (EPS) increased in the most recent quarter compared to the same quarter a year ago. The company reported $1.34 EPS for the quarter, missing the Zacks Consensus estimate by a penny. Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. Let´s compare the current ratio with the peer group in the next table:

Ticker

Company Name

ROE (%)

AET

Aetna

13.64

CI

Cigna Corp.

13.97

HUM

Humana Inc.

13.21

UNH

UnitedHealth Group Inc.

17.5

WLP

WellPoint Inc.

10.05

As we can see, the firm has a higher ROE than Humana Inc. (HUM) and WellPoint Inc. (WLP) but is below the one registered by Cigna Corp. (CI) and UnitedHealth Group. Inc (UNH).

Final Comment

The acquisitions will provide attractiveness to the company, focusing on technology and innovation, as well as building more reputation among customers in different markets. Revenues rose by 32.8% when compared to the same quarter one year prior. With respect to net income, it increased by 94% in the same time frame.

The firm is currently Zacks Rank # 2 - Buy, and it also has a longer-term recommendation of “Neutral.” In this opportunity, I would recommend investors to consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in fourth quarter 2013. Gurus like Jim Simons (Trades, Portfolio) and Larry Robins have also invested in it.

Disclosure: Victor Selva holds no position in any stocks mentioned.


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