UnitedHealth’s dividend increase should be attractive to investors

UnitedHealth Group (NYSE: UNH) upped its dividend more than 16-fold recently, from a token 3 cents once a year to 50 cents split into quarterly payments. The new yield should woo some investors who might be a little nervous about the health of the industry after the passage of health-care reform legislation.

Customers may balk, though, not realizing that the company is generating the same profit and free cash flow no matter what its dividend is. Returning money to investors may actually be the best use of UnitedHealth’s cash. The company had previously used the cash it generated to grow externally through acquisitions, but further consolidation in the insurance industry is likely to be frowned upon. Justified or not, areas with just a few insurers – and therefore a lack of competition – were associated with high health-care costs during the reform movement.

And besides, it’s not like UnitedHealth is giving up all its cash flow; the current dividend is only expected to take up about an eighth of UnitedHealth’s cash flow. That will still leave plenty of money to repurchase shares or expand externally, potentially in its Health Services businesses, which is in the business of lowering health-care costs – a popular notion these days.

(UnitedHealth Group is a “Motley Fool Inside Value” selection, and the Fool owns shares of it.)

Ask the Fool

Q. How is “the Dow” calculated? – L. M., Walnut Creek, Calif.

A. The 114-year-old Dow Jones industrial average is one of the oldest U.S. market indexes. It’s essentially the average stock price of 30 companies, such as Walt Disney, General Electric, Microsoft, Boeing, McDonald’s, Coca-Cola, ExxonMobil, IBM, Pfizer, AT&T, and American Express. It probably seems like an unlikely average, though, hovering around 10,000, since none of the stocks is selling for anywhere near $10,000 per share.

But the shares, on average, actually would trade in the neighborhood of $10,000 – if they’d never been split, issued dividends, or undergone major changes such as spin-offs or mergers during their tenure in the index.

To arrive at the index number, the stock prices of the 30 component stocks are added together, and then divided by the “divisor” (which is adjusted frequently and was 0.132319125, last time we checked). To understand how each stock affects the average, know that if, say, IBM falls by 2 points, you can just divide 2 by the divisor and learn that the Dow will fall by 15.11 points (2 divided by 0.132319125 equals 15.11).

Thus, stocks with higher prices have a bigger influence on the Dow.

Q. When a stock falls, I lose money. Where does it go? – N. P., Grand Rapids, Mich.

A. When a company’s stock price declines, nobody necessarily directly benefits. Imagine you own shares of the Free Range Onion Company (Ticker: BULBZ). If shares drop 20 percent one day, you haven’t technically lost any money – unless you sell the stock. The shares are less valuable, though. When a stock tumbles, its value isn’t redistributed: It merely shrinks. Think of how a car or baseball card will see its value change over time.

My dumbest investment

My dumbest mistake was waiting until my late 40s to even think much about my financial future. My first IRA was spent keeping my spouse and me afloat while we had only one income. My current Roth took a big hit in 2008, but recovered well in 2009. Thanks to my cleaning business going well, I’m starting to have extra money to invest. I plan to be debt-free in four or five years and am now engrossed in learning everything I can about investing. – G. B., online

The Fool responds: The earlier we start saving and investing, the better. A 30-year-old has around 35 years to build wealth until retirement, while a 45-year-old has just 20. (Those with insufficient savings should consider working a few more years – it can do wonders for your nest egg.) Many people don’t get their financial wake-up call until their 50s or later, so it’s good that you’re on the ball now. Pay off any high-interest debt first, though, before investing.