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(Tom Strickland)
(Tom Strickland)

Stock to watch: Wellpoint poised to be a healthy dividend grower Add to ...

WellPoint Inc.

Monday’s close: $61.46 (U.S.)

52-week trading range: $52.51 to $74.73 a share

Annual dividend: $1.15 a share for a yield of 1.85 per cent (does not include recent dividend hike)

Analysts’ ratings: There were 7 buys, 14 holds and 1 sell, according to Bloomberg data. Target prices ranged from $65 a share by analysts at Credit Suisse, JP Morgan and Cantor Fitzgerald to $78 a share by Chris Rigg of Susquehanna Financial Group.

Recent history: Shares of the second-largest U.S. health insurer have lost nearly 4 per cent (including dividends) over the past year. WellPoint’s stock has been weighed down by uncertainty over the impact of the U.S. Affordable Care Act on profitability when it is implemented next year. The overhaul of the health-care sector will provide coverage to millions of uninsured people, but it also imposes fees and restrictions on its industry. Under pressure from investors unhappy with the insurer’s performance and strategy, its former chief executive officer Angela Braly resigned last August. Joseph Swedish, who had served as CEO of Trinity Health since 2004, was appointed CEO and will start his job on March 25. WellPoint last week announced it was raising its quarterly dividend by 30 per cent to 37.5 cents per quarter starting later next month.

Manager insight: WellPoint’s next payout will be the second dividend increase since it initiated a payout two years ago. The insurer could become a so-called “dividend aristocrat,” or one of those rare companies that increase dividends annually for at least 25 years, says Alex Ruus, a portfolio manager with Blumont Capital Corp. who has owned its shares for over two years.

"This is a blue-chip, huge free-cash flow generator,” he said. “The fact they didn’t pay a dividend was a sore point with shareholders two years ago. One of the reasons we got involved was because there was starting to be a lot of pressure being brought to bear on the management and board [of WellPoint to do so]...Their payout ratio was in the 15-per-cent range [in 2012], so there is a lot of upside potential to pay out dividends.”

WellPoint shareholders, however, have benefited from stock buybacks, he said. “For this year, the company is expecting to buy back $1.8-billion of stock...Last year, they earned $7.56 a share, and this year we are expecting over $8 a share in earnings.”

The stock trades at under 8 times earnings, so “it’s cheap,” said Mr. Ruus, who has a target of $90 a share on WellPoint. “The fact that the dividend is increasing next month should be a catalyst in the short-term for the stock.”

While some investors might be concerned that the new CEO doesn’t come from the insurance industry, he is not worried. Mr. Swedish, who served as a director for insurer Coventry Health Care Inc., has extensive hospital experience that will be useful when it comes to negotiations related to big costs like health-care services, he added.

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