CVS Health (CVS) Dividend Stock Analysis

by | Dividend Stock Analysis

CVS Health Dividend

CVS Health has frozen the dividend at $2.00 to pay down debt used to make the Aetna acquisition.

Current Dividend Annualized: $2.00

CVS Health (CAH) Intrinsic Value – Margin of Safety Analysis            

(updated November 2021)

Normalized Diluted Earnings Per Share (TTM): $5.73
Cash Flow From Operations (CFO) Per Share (TTM): $13.47
Free Cash Flow Per Share (TTM): $11.48

Estimated Intrinsic Value: $96

Target Buy Price Based on Required Margin of Safety =  $74
(Required Margin of Safety Based On Risk Stability Grade:

A = 10%, B = 20%, C = 30%, D = 40%, F = 50%)

Target SELL Price Based on Estimated Intrinsic Value = $105
(Allow Overvaluation Adjusted by Risk Stability Grade:

A = 20%, B = 15%, C = 10%, D = 5%, F = 0%)

 

Risk / Stability Grade: C

A grade indicates a quality company with a strong balance sheet, high earnings quality, and a positive business environment. These stocks require the slimmest margin of safety within the stock universe.

B grade indicates a company with a good balance sheet, good earning quality, and a stable business environment. The margin of safety required should be greater than stocks with an A grade but less than the average stock.

C grade indicates a company with a sufficient balance sheet, at least average earnings quality, and a reasonably stable business environment. The margin of safety required is greater than A & B stocks, but less than D & F stocks.

D grade indicates a company in good standing but has issues that could affect its stability and long term risks. D rated stocks should require a large margin of safety when purchased.

F grade indicates a company with significant issues that are currently affecting its stability and long term risks. Require an extremely large margin of safety for F rated stocks when purchased.

 

Financial Risk Grade:  C

A grade indicates an extremely low probability of a dividend cut. This rating is reserved for companies with strong balance sheets and/or excellent dividend histories.

B grade indicates a very low probability for a dividend cut.

C grade indicates a low probability for a dividend cut and/or average safety risk.

D grade indicates there are issues that should be considered concerning future dividend payments.

F grade indicates serious dividend safety risks. Investors should complete comprehensive due diligence before investing.

 

Business Quality Grade:  C

A grade indicates earnings quality is high or far above average.

B grade indicates earnings quality is good and/or above average.

C grade indicates earnings quality is acceptable or average.

D grade indicates earnings quality is poor and requires thoughtful due diligence.

F grade indicates the quality of the earnings is poor or far below average requiring serious due diligence.

Earnings Report:  9/30/21

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AAAMP Portfolios Position Disclosures:
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Treasure Trove Twelve – None
Global Dividend Balanced – None
Global Value – Long
Global Value Aggressive – None
High Yield – None

Company Description

Sector: Healthcare
Industry: Healthcare Plans

Following its acquisition of Aetna in late 2018, CVS Health now provides an even more integrated healthcare-services offering for its members. Adding a managed-care organization with over 23 million medical members gives the company a strong position in the insurance industry and should help CVS better control overall healthcare costs for its clients.

Legacy CVS combined both the largest pharmacy benefit manager, processing over 2 billion adjusted claims annually, and a sizable pharmacy operation, including nearly 10,000 retail pharmacy locations primarily in the U.S. 

SWOT Analysis

Strengths

Through strategic mergers and acquisitions CVS has evolved into one of the largest pharmacy retailers and a top-tier Prescription Benefit Manager (PBM). The company has significant competitive advantages because of its size.

CVS and Walgreen’s operate as a duopoly. Economies of scale and pricing power give CVS unmatched advantages. Demographics and trends in medicine (i.e. increased insurance coverage) provide powerful drivers for continued growth.

Weaknesses

Pricing pressure can come from above and below in a vertically integrated company. Consolidation among drug suppliers could chip away at CVS pricing power. PBM members may demand more pharmacy choices which can chip away at CVS profits.

The massive amount of debt to acquire Aetna is a problem. CVS must use cash flow to reduce this burdensome debt.

Opportunities

No company has done a better job of growing through acquisitions than CVS (i.e. Target’s pharmacies, Omnicare, Long Drugs’ Stores, Minute Clinic, etc.).

Threats

Walgreens is a formidable competitor with many of the same competitive advantages as CVS. However, both companies must deal with increased competition from retailers and mass grocers in non-pharmaceutical products. In addition changes in insurance (i.e. Medicare, Medicaid, and Obamacare) bring uncertainty. Potential changes in rebate structures for drug distribution could lower PBM profitability industrywide.

 

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Disclaimer:
While Arbor Investment Planner has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability, or completeness of third-party information presented herein. The sole purpose of this analysis is information. Nothing presented herein is, or is intended to constitute investment advice. Consult your financial advisor before making investment decisions.

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