CVS had my attention when I was watching Target. It had bought out the whole pharmacy operations from target. Yikes! For Walgreen who is trying to buy off RiteAid to compete but facing tough regulations.
I was looking at CNBC before noticing CVS was down $70, one of the red hot biggest loser of the day. I thought to myself: “this can’t be it!” Something is going on. So I did a little digging.
- CVS Health has a long history of strong earnings and dividend growth.
- The stock sold off due to fears of more government controls on pharmacy benefit managers, missed revenue and profit. Basically, it was one of the casualty of the Clinton sweeping poll. We came to find out, it was not true, Trump won the election. (Yikes!)
I saw the stock was down to $70 from the $90s. Down to the 2-year low level. Why not? So I took 10 shares of CVS for the even $70.00/share.
Here is the 5-year chart:
CVS Health is an integrated pharmacy and health care services company that is headquartered in Woonsocket, Rhode Island. The company operates through four main offerings: CVS Pharmacy, CVS Caremark, CVS MinuteClinic, and CVS Specialty.
CVS Pharmacy is America’s leading retail pharmacy with over 9,600 locations. CVS Caremark is the pharmacy benefits manager “PBM” portion of the business that offers services and support for a national network of over 68,000 retail pharmacies and manages benefits for over 75 million plan members. CVS MinuteClinic offers over 1,100 locations where nurse practitioners and physician assistants provide basic health care services including diagnosis and treatment of minor health conditions, health screenings, monitoring of chronic conditions, wellness services, and vaccinations. Finally, CVS Specialty operates 24 retail specialty pharmacy stores and 11 specialty mail order pharmacies that offer services for patients who require treatment for rare or complex medical conditions.
The only year of negative growth came way back in 2001 during the dotcom bust recession. Even more impressively, the company has grown earnings by greater than 10% in 16 of the last 20 years.
This has led to robust dividend growth as the company has matured and expanded its payout ratio. The company began growing the dividend in earnest in 2004, and has produced an annualized dividend growth rate of 25.4% over the last decade. Management has targeted a 35% payout ratio by 2018, which is a fairly significant boost from the current payout ratio of 29% of expected 2016 earnings. With analysts currently projecting annual EPS growth of around 12.5% going forward, there could be a few more years of ~20% dividend growth until the 35% target payout ratio is met.
Shrinking Share Count & Expanding Business
With the dividend payout ratio at a reasonable 30-35% of earnings, there remains plenty of cash flow left over for an effective share repurchase program. CVS has done an excellent job of implementing the program, as the number of shares outstanding has declined by nearly 32% since 2007.
*** I might have regret buying a little because nobody knows what Donald Trump will negotiate with the pharmaceutical industry, it can prove lower revenues due to decline of drug cost. Although, how effective he can be remain to be seen
CVS has many attractive qualities to me as a long term investment. It has produced a 20 year track record of strong earnings growth, and operates in an industry where I expect it can continue that growth going forward. While its dividend yield is a bit lower than other stocks in my portfolio, there appears to be ample room for it to grow, and I expect several more years of ~20% growth before it falls in line with earnings after the 35% targeted payout ratio is met.
In addition to the dividend, the company has also been aggressive in returning capital to share holder and has been opportunistic in using mergers to further boost growth. With a current yield of 2.1% and long-term growth expectations of 10%+, I think there is a decent chance of seeing 12%+ annual total returns from the stock.
For the above reasons, I choose to ignored the short-term noise and made CVS a long-term buy for my portfolio.