CVS Health Corp: Is CVS Stock a Top Dividend Growth Stock?
January 20, 2017
CVS Stock Benefits From Shareholder-Friendly Management
CVS Health Corp (NYSE:CVS) stock operates in the American retail pharmacy and health care sector.
As an income investor, the desire is always to find a top dividend growth stock. This is because, as more time is spent in the investment, income investors expect to be rewarded with a growing payout. In other words, the yield on cost is expected to go higher over time.
When looking at a top dividend growth stock, the company’s past actions should be looked at, as should the financial statements, to determine whether the dividend is sustainable over time.
CVS stock would fit these criteria, making it a top dividend growth stock. The dividend has seen an increase every year since 2004, totaling growth of 1,840%. The dividend is reviewed annually in December, with last month seeing the streak continue with a hike of 17%.
The payout ratio is also important when it comes to future dividend growth. This ratio is calculated by taking the current dividend payment and dividing it by the earnings of the company. For CVS stock, the payout ratio is currently 34%, meaning the dividend could increase in the future.
Management has taken advantage of the modest payout ratio by buying back shares. There is currently a $15.0-billion share repurchase program in the wings, which will begin following the completion of the current program, which still has $3.7 billion worth of shares to go. This combined $18.7 billion in shares will account for approximately 21% of the business’s market cap. (Source: “CVS Health Reports Third Quarter Results,” CVS Health Corp, November 8, 2016.)
From a shareholder’s perspective, buybacks are a major positive because they incite continued buying of the company’s shares. This will give support to the share price and, if for some reason the share price were to drop further, the company, believing its shares to be undervalued, could buy back more to take advantage of the lower market price.
Valuation
CVS stock is currently trading at $83.40 and is offering a current dividend yield of 2.4%.
The stock has a price-to-earnings (P/E) ratio of 17.77 times, which is much lower than the S&P 500 index’s ratio of 25.41 times. This means CVS stock would be purchased at an approximate 30% discount.
The balance sheet for CVS does have debt on it. However, according to the company’s debt-to-capital ratio of 42%, this isn’t an issue. Only if this ratio is 50% or above is the company considered to have too much debt. Because CVS stock’s debt-to-capital ratio is below this threshold, it means the company is using the debt wisely to develop the business.
Another reason why you should consider investing in CVS stock is its the daily volatility, which is less than the overall market. On average, the stock should outperform the market on a down day.
Final Thoughts on CVS Stock
CVS stock would be considered a top dividend growth stock, if only because of the continued history of rewarding shareholders with a consistent dividend increase. The share buybacks are an additional bonus. In other words, the company is very shareholder-friendly.
