On Monday, Coventry Health Care Inc. (CVH) announced the initiation of a quarterly cash dividend policy in a bid to deploy its excess capital efficiently and enhance shareholder value. Consequently, the company will pay its first quarterly dividend of 12.5 cents per share on April 9 to shareholders of record as of March 23.

The dividend initiation was facilitated by Coventry’s strong balance sheet with about $900 million of deployable cash at the end of 2011. Considering the tally of 146.7 million outstanding shares at the end of 2011, the company requires about $18.34 million every quarter for dividend payment. This leaves substantial free cash for share repurchases as well as strategic acquisitions.

Coventry has a strong capital deployment policy through regular share repurchase. In 2011, the company repurchased 10.7 million shares for an aggregate cost of $327.7 million. Moreover, in November 2011, Coventry increased its share repurchase authorization by 14.4 million shares.

We believe that the commencement of a dividend policy will boost investors’ confidence in the stock, thereby driving share value. Moreover, Coventry has no debt repayment scheduled in the next couple of years, which coupled with $1.58 billion of cash and cash equivalents at 2011-end leaves ample scope for further capital deployment.

Most of the health insurance companies regularly return value to their shareholders via dividend payments. Coventry’s rival WellPoint Inc. (WLP) recently increased its dividend by 15% to 28.75 cents per share from 25 cents paid earlier.

Currently, the Zacks Consensus Estimate for Coventry’s first-quarter earnings stands at 61 cents per share, down about 7.5% year over year. Only one of the 14 analysts covering the stock revised the estimate downward in the last 30 days, while no upward revision was witnessed. For 2012, earnings are pegged at $3.25 per share, climbing about 13.2% over 2011.

Shares of Coventry currently carry 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.

To read this article on Zacks.com click here.

Zacks Investment Research