Yahoo Finance These 3 Healthcare Stock Dividends Could Soar If Trump Signs a Tax Reform Bill
Now that tax reform bills featuring 20% tax rates have passed the House and Senate, it looks like companies across the country will get to distribute a lot more of the profits they generate. Of course, some will be affected more strongly than others.
Although nearly all U.S. corporations hand less than 35% of global profits over to the taxman, there are a handful of big healthcare companies that don't get to take advantage of some important loopholes. Anthem Inc. (NYSE: ANTM), UnitedHealth Group Inc. (NYSE: UNH), and CVS Health Corp. (NYSE: CVS) consistently pay more than 35%, suggesting they'll have heaps of extra cash to distribute in the years ahead.
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We can't say exactly how low these companies' effective tax rates will fall in response to the GOP tax plan, or when -- the House version would slash the corporate rate in 2018, while the Senate version waits until 2019. Instead, here's a look at how much more each of these companies could have available to distribute if their effective tax rates plunge to 20% from present levels.
Consolation prize
The U.S. Justice Department won't allow the top five U.S. health insurers to merge to maintain a healthy level of competition. Although these companies won't be able to boost efficiency by combining redundant operating expenses, they are in line for some massive tax breaks that would give them a lot more cash to distribute.
Perhaps the largest break will go to Anthem Inc., a health insurer that boasts around 40 million members. Last year, the company reported earnings of $9.21 per share, which was impressive considering it also set aside a whopping 45.8% of pre-tax profit to pay taxes. If Anthem's effective tax rate had been 20% last year, earnings would have come in about 48% higher at $13.82 per share.
At recent prices, Anthem shares offer a meager 1.2% yield, but a tax cut to 20% could leave enough profits on the table to bump the yield above 3% without raising the percentage of post-tax profits that dividend payments eat up. Over the past year, Anthem used just 23.4% of its post-tax profits to meet its dividend obligation.
A big break for the behemoth
With a 40.4% effective tax rate, UnitedHealth Group Inc. is another big health insurer that might offer its shareholders a big payout bump if the GOP tax plan becomes law. In 2016, the company reported post-tax earnings of $7.37 per share. If the company had been required to set aside just 20% of pre-tax profit it would have earned about 35% more, or around $9.97 per share.
In recent years, UnitedHealth Group has successfully integrated a pharmacy benefits manager (PBM) and a data analytics service into its giant health insurance operation, and the combined behemoth is more profitable than ever. The company used just 31% of earnings generated over the past year to make dividend payments, which means it could probably forward every penny of a tax break to the distribution.
At recent prices, UnitedHealth Group stock offers a meager 1.3% yield that could rise significantly. Forwarding all proceeds of the proposed tax break would probably allow the company to bump that up to around 2.5%, based on the stock's recent price, without breaking a sweat.
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A very big deal
CVS Health practically wrote the book on vertical healthcare mergers, and it just announced a $69 billion megamerger that will most likely add Aetna's (NYSE: AET) health insurance operations to the house its retail pharmacies built. That house has expanded several times over the past decade and now includes the country's largest PBM, plus a chain of 1,129 private health clinics across 33 states.
Insurers like Aetna save a bundle when their members visit CVS Health's MinuteClinics instead of hospital emergency rooms, and again when CVS Health's PBM negotiates lower drug prices from pharmaceutical companies. Merging with Aetna could give CVS Health tons of synergy-driven profits to look forward to, and the GOP's tax plan could help the company distribute heaps more to shareholders.
The company earned $3.13 per share last year after setting aside 38% of pre-tax profits for Uncle Sam, but a 20% effective tax rate during the period would have resulted in earnings per share about 30% higher, or around $4.07 per share.
Although the benefits of the proposed tax cut probably won't be as dramatic for CVS Health as they could be for Anthem or UnitedHealth Group, they could make an already tempting dividend downright irresistible. At 2.8%, this stock offers the highest yield of among these three healthcare players at recent prices. Forwarding all proceeds of the proposed tax cut to the dividend could raise the yield above 4%, and that's before we factor in this company's tendency to boost its dividend at an impressive pace.
A more likely scenario
Remember, we still don't know if a final version of the tax bill will lower the corporate rate to 20%, and there's a good chance these companies won't be able to lower their effective tax rates all the way down to 20% even if it does. Even though there isn't much incentive for these companies to hire more workers with their potential savings, we really can't expect them to funnel every penny to shareholders.
For example, CVS Health needed 40% of post-tax profits to make dividend payments over the past year, but management intends to lower its payout ratio to 35%. The company also intends to pull off a $69 billion acquisition in the months ahead. Even if CVS Health can lower its effective tax rate to just 20%, distributing every penny saved might not be a prudent course of action when the time comes.
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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool recommends CVS Health and UnitedHealth Group. The Motley Fool has a disclosure policy.
