Tuesday, April 7, 2015

CVS Health Corporation (CVS) Dividend Stock Analysis

Linked here is a detailed quantitative analysis of CVS Health Corporation (CVS). Below are some highlights from the above linked analysis:

Company Description: CVS Health Corporation is the largest pharmacy health care provider in the U.S.

Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

CVS is trading at a premium to all four valuations above. When also considering the NPV MMA Differential, the stock is trading at a 19.0% discount to its calculated fair value of $126.58. CVS earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%

CVS earned two Stars in this section for 2.) and 3.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. CVS earned a Star for having an acceptable score in at least two of the four Key Metrics measured.

Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2005-2008, 2006-2009, 2007-2010, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1916 and has increased its dividend payments for 12 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to > MMA

CVS earned a Star in this section for its NPV MMA Diff. of the $5,318. This amount is in excess of the $2,300 target I look for in a stock that has increased dividends as long as CVS has. If CVS grows its dividend at 20.0% per year, it will take 4 years to equal a MMA yielding an estimated 20-year average rate of 2.47%. CVS earned a check for the Key Metric 'Years to >MMA' since its 4 years is less than the 5 year target.

Peers: The company's peer group includes: Express Scripts Holding Company (ESRX) with a 0.0% yield, Rite Aid Corporation (RAD) with a 0.0% yield, and Walgreen Co. (WAG) with a 2.0% yield.

Conclusion: CVS earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks CVS as a 4-Star Strong stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $105.09 before CVS's NPV MMA Differential decreased to the $2,400 minimum that I look for in a stock with 11 years of consecutive dividend increases. At that price the stock would yield 1.1%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,400 NPV MMA Differential, the calculated rate is 17.7%. This dividend growth rate is below the 20.0% used in this analysis, thus providing a margin of safety. CVS has a risk rating of 1.75 which classifies it as a Medium risk stock.

CVS enjoys a strong market share in the relatively stable U.S. retail drug industry. The company is facing higher costs associated with its Medicare Part D business that could lower near-term operating profits. On a positive note, the company in July 2014 launched a generic drug joint venture with Cardinal Health (CAH). This should result in decreasing drug purchasing costs as contracts are renewed throughout 2015.

In 2014 the company changed its name from CVS Caremark Corporation to CVS Health Corporation to reinforce its health and wellness commitments. Along those lines, CVS in early September 2014 announced that it would no longer sell cigarettes and other tobacco products at all its pharmacy outlets.

CVS is well-positioned to benefit from increased drug demand from an aging population and an increase in generic drug sales. In addition, its July 2014 generic drug joint venture with Cardinal Health (CAH) should help lower drug costs as contracts are renewed throughout 2015.

February 10, 2015 CVS Health Corporation (CVS) operating results for the three months and year ended December 31, 2014 including a 12.9% increase in net revenues to a record $37.1 billion, operating profit increased 4.7% to $2.3 billion and adjusted EPS of $1.21 increased of 8.4%. In addition, the company confirmed its confirmed its full year 2015 guidance for adjusted EPS of $5.05 to $5.19, and first quarter Adjusted EPS of $1.06 to $1.09.

The stock is trading below my $126.58 calculated fair value and has demonstrated an exceptional ability to grow its dividend at a high rate, averaging nearly 25% per year since 2005. However, its current yield is well below my minimum for my Dividend Growth Portfolio, but will give it consideration for my High Dividend Growth Portfolio.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I held no position in CVS (0.0% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.

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