CVS Health (CVS) raises dividend by 18% & price decline offers investors an excellent entry point.

CVS Health’s (NYSE:CVS) dividend was increased by a solid 18%. Its overall yield is 2.54%. The firm started paying a dividend in 1993.

CVS Health is one of the largest retail pharmacy chains in the United States that also maintains a big pharmacy benefit manager division. The company processes over a billion prescriptions per year. It also maintains 10,000 plus retail pharmacies across the U.S.  The Pharmacy Services segment offers pharmacy benefit management solutions, such as plan design and administration, mail order, specialty pharmacy, and prescription management systems. The Retail segment sells over-the-counter drugs, food, photo shop, general merchandise, and beauty products and cosmetics. CVS Health is headquartered in Woonsocket, Rhode Island.

CVS has maintained a solid three-year growth rate of dividends of 23.6 percent. CVS currently ranks 1st in yield within the large cap services, drug stores category. The quarterly dividend for the February payment will be $0.50 versus the prior year rate of $0.425 per share. CVS Health Corp. is a member of our Top 100 Dividend Stock List (see below).

top-100

The dividend will be paid at the new higher rate on February 2, 2017, to shareholders of record at close of business on January 24, 2017. CVS is currently priced at $78.79. Listed in the table below are the quarterly dividend payments since 2010.

Date Quarterly Dividend
1/24/2017 0.5
10/20/2016 0.425
7/19/2016 0.425
4/20/2016 0.425
1/20/2016 0.425
10/20/2015 0.35
7/21/2015 0.35
4/22/2015 0.35
1/20/2015 0.35
10/21/2014 0.275
7/17/2014 0.275
4/17/2014 0.275
1/21/2014 0.275
10/17/2013 0.225
7/18/2013 0.225
4/19/2013 0.225
1/22/2013 0.225
10/18/2012 0.163
7/19/2012 0.163
4/19/2012 0.163
1/19/2012 0.163
10/19/2011 0.125
7/20/2011 0.125
4/19/2011 0.125
1/19/2011 0.125
10/20/2010 0.088
7/20/2010 0.088
4/21/2010 0.088
1/20/2010 0.088


Quantitative
 Analysis:

We examine CVS upon our five key criteria, which include; 

Category Value Score
Dividend Yield 2.54% 208
Dividend Growth (3 to 6 year avg) 27% 54
Forward P/E 13.48  77
S&P Financial Rating BBB+ 160
Beta  0.85  100
Total Score   599

Additional quantitative information on P/S ratio and historical yield;

% Yield 3 Year Div. Growth Rate 6 Year Div. Growth Rate SPS 2016 P/S Ratio 10 yr P/S Low 10 yr P/S High 5 yr lowest Yield % 5 yr max Yield %
2.54% 23.6% 30.4% 168 0.47 0.40 0.82 1.13% 2.54%

Positives;

  • CVS maintains an investment grade credit rating and a current dividend yield (2.54%) is above the market and at its five-year maximum.
  • CVS has maintained a three-year growth rate of dividends of 23.6 percent.
  • CVS’ dividend yield is above that of the S&P 500 Index.
  • CVS maintains a beta of 0.85, lower than the average company.
  • CVS is trading at the bottom of its ten-year average price/sales (P/S) ratio.

Latest Earnings & Overall Analysis:

CVS issued its earnings data on November 8th. The company reported $1.64 EPS for the quarter, beating the consensus estimate of $1.57 by $0.07. CVS’s quarter was mixed as earnings results were positive while revenue missed guidance. The healthcare giant also indicated further margin declines due to reimbursement pressures.  CVS guided down its full-year 2016 earnings expectations to $5.77–$5.83 from $5.81–$5.89. This was at least six cents below most analyst expectations.

On the positive front, CVS benefited from the recently acquired Omnicare and pharmacy benefits from Target. CVS Health’s specialty business also is a large profit generator as its Specialty Connect business should continue to grow. The acquisition of pharmacies located within Target Corporation stores will give CVS new customers.  Its new “ScriptSync” service launched last year has also been well received by investors.  This is a service that attempts to work with the customer to make prescription pickup and ordering more convenient.  Transform Diabetes Care is also a new program in its pharmacy benefit management division that will assist their clients to improve health outcome of diabetic patients.  The major goal of Transform is to alleviate the large medical costs associated with the disease by improving medication adherence.  Another merit is the company’s devotion to shareholders. It pays a high relative dividend and also buys back its own stock at an elevated level. The current buyback program is for $3.7 billion shares.  The firm bought back over $4 billion in stock in the first half of 2016, albeit at higher prices.

Company shares of the pharmacy giant fell by more than 18% during 2016, joining many other healthcare firms in the “worst” category. The first half of the year was a big success for the firm. However, CVS’s stock fell after news broke that Walgreens had signed a deal with Prime Therapeutics, the fourth-largest pharmacy benefits manager (PBM) in the country. Prime’s 20 million plus members would now move to Walgreens, thus CVS lost a major customer. Tricare then joined Walgreens as well. Tricare is the leading insurance program for the U.S. military.  Tricare maintains a membership of nearly 10 million military personnel. There is also the merger between Walgreens and Rite Aid, which should allow Walgreens to better compete for customers. Thus the loss of over 35 million retail prescriptions for 2017 had the largest impact on the stock and management’s expectations for next year.

But prescriptions are not fortunately the only part of CVS’s business. The company does have diversification through its pharmacy benefit manager division.  That division contributes nearly half of profits for the firm. The Omnicare acquisition is still moving forward, thus providing for cost savings and a new avenue for growth. Omnicare is the leading provider of pharmacy services to long term care facilities. Omnicare has approximately 13,000 employees at 160 locations in 47 states across the U.S. CVS will now become the largest player in dispensing prescriptions to assisted living and long term care facilities. It also allows the company to enhance its rapidly growing specialty pharmacy business. On the financial front, management indicated that the acquisition to be 20 cents accretive to EPS in 2016 and continue beyond to 2017.

At the same time the firm announced its solid dividend raise, it also reaffirmed EPS outlook at $5.77–$5.93 for 2017. The EPS guidance also assumes a $5 billion share repurchase during 2017. In 2017, the company also anticipates free cash flow of $6.0 billion to $6.4 billion, well beyond what is needed to fund buybacks and another dividend increase. Overall, with the price drop, CVS stock is now more attractive to dividend investors than in many years. It trades at 13.5 times next year’s earnings. Its yield based upon the new payout is 2.5%, above that of the market. It also trades at a historical low price/sales ratio of .48

Based on the firm’s low valuation, higher than average dividend yield, strong dividend growth, and investment grade rating, CVS remains as a member of our  Top 100 Dividend Stocks. Due to the 2016 price decline and 18% increase in dividend, the stock has recently been moved up into the top ten.  

CVS Health Corp. Dividend Yield Chart (Click to enlarge)

cvs3

Chart Explanation:  Dividend growth stocks may be viewed favorably when the current yield is above historical readings for the past 5 years.

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