(Reuters) - Health insurer Aetna Inc forecast 2011earnings well ahead of Wall Street's target on Friday and dramatically increased its dividend payout, sending shares up more than 8 percent.

The No 3. U.S. health insurer, which posted a slightly higher-than-expected quarterly profit, forecast 2011 operating earnings, excluding items, of $3.70 to $3.80 per share. Analysts were looking for $3.27.

Aetna's forecast equates to slightly higher operating earnings in 2011 than the $3.68 per share it reported in 2010. Forecasts from rivals such as UnitedHealth Group Inc and Humana Inc have included at least the possibility of declining profit in 2011 although many analysts have deemed those forecasts conservative.

The industry faces new spending rules this year from the healthcare overhaul law that may cut into profits and is factoring in a rebound in use of medical services after Americans avoided procedures in 2010 to save money.

Aetna's 2011 forecast includes an estimate of fewer shares outstanding than in 2010 -- about 384 million in 2011 vs. 403.3 million on average reported for the fourth quarter -- which appeared to explain in part why the forecast was ahead of estimates. The company did not include more details about its 2011 outlook ahead of a call with analysts later on Friday.

Goldman Sachs analyst Matthew Borsch said he expected Aetna was seeing less of an impact than he estimated from the new spending rules, which require insurers to meet certain thresholds for medical care expenses as opposed to administrative costs and profit.

Aetna said fourth-quarter profit rose 30 percent to $215.6 million, or 53 cents per share, from $165.9 million, or 38 cents per share, a year earlier.

Excluding items, earnings of 63 cents per share topped analysts' estimates by 1 cent, according to Thomson Reuters I/B/E/S.

Revenue slipped more than 2 percent to $8.54 billion.

INDUSTRY'S HIGHEST DIVIDEND

Rival health insurers have beaten analyst forecasts more substantially for the fourth quarter. Wells Fargo analyst Peter Costa said he suspected Aetna decided to boost operating expenses in the quarter as the company repositions under new Chief Executive Officer Mark Bertolini and for its new pharmacy benefit deal with CVS Caremark Corp.

Bertolini, who ascended to the CEO job at the end of last year, wants to diversify the health insurer into information technology and international markets.

Aetna said it had increased the cash dividend to 15 cents per share per quarter, up substantially from its previous payout of 4 cents per year.

The move follows a similarly sharp dividend increase from UnitedHealth last year [ID:nN26188186]. Wall Street has speculated that the largest insurers could return more cash to shareholders.

Citigroup analyst Carl McDonald noted Aetna's dividend yield of 1.8 percent was slightly better than UnitedHealth's 1.2 percent yield.

Citigroup analyst Carl McDonald noted Aetna's dividend yield of 1.8 percent was slightly better than UnitedHealth's 1.2 percent yield. McDonald said he expects WellPoint to institute a dividend yield of 2 percent later this month.

"Aetna now has the highest dividend in the managed care sector, and should attract long-only money from dividend only funds and spark multiple expansion," Gupte said in a research note.

Aetna said fourth-quarter profit rose 30 percent to $215.6 million, or 53 cents per share, from $165.9 million, or 38 cents per share, a year earlier.

Excluding items, earnings of 63 cents per share topped analysts' estimates by 1 cent, according to Thomson Reuters I/B/E/S.

Revenue slipped more than 2 percent to $8.54 billion.

Rival health insurers have beaten analyst forecasts more substantially for the fourth quarter. Wells Fargo analyst Peter Costa said he suspected Aetna decided to boost operating expenses in the quarter as the company repositions under new Chief Executive Officer Mark Bertolini and for its new pharmacy benefit deal with CVS Caremark Corp (CVS.N).

Bertolini, who ascended to the CEO job at the end of last year, wants to diversify the health insurer into information technology and international markets.

Aetna shares rose $3.48, or 10.5 percent, to $36.75 in morning trading on the New York Stock Exchange.

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