CVS Health Corp: Why CVS Stock Is a Great Dividend Stock
October 21, 2016
Upside for CVS Stock?
CVS Health Corp (NYSE:CVS) stock is the largest company in the pharmacy space in the U.S., with two main segments: pharmacy services and retail. This is a company to keep an eye on, given the amazing second-quarter earnings, with net revenue increasing year-over-year by 17.6%. Typically, it is unheard of to see growth of this magnitude in such a company, one with steady and reliable cash flow. Management has not been shy about increasing this dividend-paying stock in the past. (Source: “CVS Health Reports Second Quarter Results,” CVS Health Corp, August 2, 2016.)
Dividend Growth
CVS stock has seen an increase in its dividend in each of the last eight years for a total increase over this period of 708%. Based on the current trading price of CVS stock at $87.18, the current yield is 1.95%. This dividend stock has more room to grow, with the payout ratio sitting at 29%, and the yield could easily be doubled to four percent. The reason that management hasn’t done so is because there are opportunities to grow the business organically and through acquisitions.
Growing the Business Strategically
In December 2015, CVS announced the purchase of Target Corporation’s (NYSE:TGT) pharmacy and clinic business for $1.9 billion. The pharmacy will be a “store in a store,” within Target locations. The acquisition has broadened the footprint of CVS across the U.S., which includes 1,672 pharmacies across 47 states. This does not include the 20 new clinics to be opened in the next three years that were announced in the same statement. (Source: “CVS Health and Target Announce Completed Pharmacy and Clinic Businesses,” CVS Health Corp, December 16, 2015.)
CVS Health’s management team is also focused on the company’s own existing stores. The goal is mainly to combine a pharmacy with a retail store to get the best of both worlds. At the end of the day, the company aims to give customers more choice and convenience. The company is doing a great job so far, with the top and bottom lines of the financial statements seeing double-digit growth. (Source: “CVS Health Reports Second Quarter Results,” CVS Health Corp, August 2, 2016.)
Aging Populations Means More Business
CVS stock is operating a business in the consumer staples sector, which consists of companies with products we need to live day-to-day. A steady business such as this is reflected in the low volatility of day-to-day trading. The company is also focused on customer loyalty.
In 2015, CVS Health launched “ScriptSync,” which is a service that allows patients to pick up their prescriptions based on their schedule. This particularly targets those that need the same medicine on a more frequent basis. The goal of ScriptSync is to drive foot traffic into the store, which means it will trickle down to the bottom line, especially given the aging demographic in the U.S.
The great competitive advantage for CVS stock over main rival Walgreens Boots Alliance Inc (NASDAQ:WBA) is CVS’ growing pharmacy benefit management, which has over 2,000 health care plan sponsors. This reflects a third of the earnings numbers from CVS stock in a space in which Walgreens has no position. Therefore, CVS stock is much more diversified. (Source: “2014 PBM Market Share,” Pharmacy Benefit Management Institute, March 31, 2015.)
