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HCA Gives Shareholders Chest Pain: Street Whispers

The question is whether the practice -- a private equity industry standard called a "dividend recapitalization" -- is suitable for ordinary stockholders now that HCA is a U.S.-listed company with a market cap nearing $12 billion. Those questions are only accentuated by HCA's debt load, leverage ratios, shareholder equity deficit and junk bond ratings.

In maintaining a sub-investment grade B+ rating on HCA's billions in newly issued and outstanding debt, ratings agency Standard & Poor's notes the company's private-equity-like dividend practices as a key risk.

"Because HCA has an extensive history of large shareholder distributions as a public company, we believe dividends to its equity partners and shareholders may take precedence over sustainable debt reduction, keeping it highly leveraged," S&P credit analyst David Peknay wrote in a November 2011 ratings opinion.

In 2010, the calendar year prior to HCA's IPO, Bain and KKR paid themselves total dividends in excess of $4 billion, nearly matching their initial combined equity investment of $5.5 billion. That practice of plowing cash flow and earnings back to investors instead of balance sheet repair from the debt-laden 2006 buyout appears to be a key to HCA's financial management, even as it becomes majority-owned by U.S. stock investors.

Because the bulk of HCA's debts come due at the end of the decade and the company generates industry-leading cash flow and profit, analysts don't appear worried about what would normally be considered an outrageous debt. No analysts covering HCA give it a "sell" rating. Meanwhile, they hold 20 "buy" recommendations and four "holds," according to Bloomberg data.

In the aftermath of Monday's New York Times report, some covering the stock expect allegations of abusive cardiology practices and aggressive revenue policies to eventually blow over. In fact, they point to second-order risks that are seemingly unrelated to the Times allegations, HCA's management practices, or the issue of medical fraud.

"Media scrutiny will likely also highlight Bain Capital's relationship to HCA given how critical the Obama campaign has been of Romney and his work at Bain Capital," wrote Jefferies analyst Arthur Henderson in an Aug 6 report that maintained HCA's "buy" rating, but cut its price target nearly 12% to $30. "Expect anxieties to run high this week, but we think they will abate shortly, sooner rather than later," added Henderson, who noted that the reports, and a prospective DoJ inquiry clouded HCA's strong second-quarter earnings, in an assessment that mirrored consensus.

Whatever the outcome of HCA's cardiology practices, it's resoundingly clear that the company's titanic debt stock shouldn't be expected to "abate" any time soon.

That's where investors should pay attention.

-- Written by Antoine Gara in New York
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