Increasing quarterly dividends might be a better use of excess life company cash than buying back stock.

Suneet Kamath and other analysts at Sanford C. Bernstein & Co. L.L.C., New York, make that case in a comment on the best way for life insurers to handle the new stock market slump.

The slump has hit life insurer prices so hard that it seems likely that life insurers will earn at least 24% more in 2012 than their stock prices imply, the analysts say.

Life insurers should do well, even if the economy cools, because they have more capital, more liquidity and better balance sheet quality than they did when the 2008 crisis started, the analysts say.

Meanwhile, even though the yields life insurers are earning on investments in debt issued by the Treasury are low, life insurers tend to invest more their money in other classes of assets, such as commercial real estate. In those asset classes, yields are holding up better, the analysts say.

Public companies with extra cash have two quick ways to make their stock more appealing: they can buy back stock or pay more dividends.

Buying back stock can increase the level of earnings per share and revenue per share, even if overall earnings and revenue stay the same.

Adding a dividend, or increasing a dividend, increases the amount of income investors earn.

“While share buybacks are an attractive use of excess capital, long-term and near-term history suggests companies’ actions in this regard have been poorly timed,” the analysts say. “As such, we feel life insurers should prioritize common stock dividends over buybacks.”

If the life insurers Bernstein tracks used half of the money earmarked for sharebuybacks to increase dividends, they could boost the average 2012 dividend yield to 4.8%, from 1.5% this year, the analysts say.

Higher life company dividends could make life stocks especially attractive given how low U.S. Treasury yields now are, the analysts say.

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