Retail pharmacy giant CVS Health (CVS, Financial) recently reported exciting earnings results, exceeding Wall Street's expectations for the third consecutive quarter. Revenue jumped 10% year-over-year, helping the company shrug off some negative developments.
In September, the company had suffered a hit because of a $5 billion fine. The fine was associated with mishandling of opioid painkiller prescription. However, this is a momentary hiccup for CVS, and the company is not getting bogged down by this.
In the long run, CVS is looking to push its growth into other health care sectors by purchasing Signify (SGFY, Financial), an at-home health care company, for $8 billion. This is a key component in its plans to turn itself into a primary care provider. The purchase is expected to close in the first half of 2023.
I believe CVS Health has what it takes to succeed in primary health care, and the entry into this space will provide synergies with its pharmacy and insurance business. CVS Health's pharmacies offer convenience and easy prescription refill processes for consumers, which could bring it incredible success in moving into other health care fields.
Investors shrug off an opioid settlement to reward CVS after stellar earnings
CVS is settling several opioid lawsuits worth $5 billion. The company was accused of mistreating opioid prescriptions, which may have led to drug abuse. CVS will pay the $5 billion over 10 years. Walgreens (WBA, Financial) has also agreed to pay a similar amount, while Walmart (WMT, Financial) settled for $3 billion. This settlement will be uncomfortable for all three companies, but they should recover in the long run. CVS, in particular, has seen its stock price bounce back quickly thanks to its consecutive strong quarters.
CVS posted a 10% increase in total revenues during the third quarter of fiscal year 2022, reaching $81.2 billion compared to $73.79 billion in the prior-year quarter. The revenue growth for the health care benefits and pharmacy service segments grew by 9.9% and 10.7%, respectively.
Nonetheless, the loss per share was $2.60, which stems from a pre-tax charge of $5.2 billion for its opioid litigation and an additional pre-tax disappointment of $2.5 billion pre-tax loss from Omnicare's long-term care pharmacy business during the quarter. However, it still beat Wall Street's estimates. Notably, CVS plans to sell Omnicare as the company no longer considers it a strategic asset.
Tailwinds will help CVS grow for several years to come
CVS was one of the few businesses that thrived during the beginning of the Coronavirus outbreak. It operates in the health care sector and could not have been more in its element during this period. CVS stores were the epicenters of the fight against this virus as they helped distribute vaccines and tests.
While that was a short-term boost, CVS also has longer-term tailwinds, including the fact that people have become more aware of their health. Millennials, in particular, are more health conscious because of their access to online health information. As a result, CVS could continue to see an increase in business for years to come. Millennials, the largest generation group in the U.S. at the moment, possess significant clout in business decisions.
CVS offers various services such as MinuteClinics, prescriptions and everyday health and body care products, which appeal to consumers looking to take care of their health. In addition, CVS has made changes to its stores, such as adding natural light and eliminating cigarette displays to create a more welcoming environment. These changes have resonated well with customers, and CVS says it is seeing positive results.
Considering that the annual revenue was just $185 billion in 2017 and is expected to be $314 billion in the full 2022 fiscal year is encouraging.
CVS Health is moving into different areas to diversify revenues
CVS has a long history of acquiring and opening stores to increase its service base. They traditionally buy stores from competitors, but more recently, the company is making several strategic moves to expand its product and service portfolio.
These moves include MinuteClinic, which offers retail clinic services, Coram, an infusion service, and health insurer Aetna to enter the insurance industry. These and other similar acquisitions allow CVS' income streams to become more diverse and create synergies.
CVS also plans on utilizing more space for its medical services in the stores, reducing the space allocated to the slower-moving merchandise sold on the retail side. The plans for new store designs were put off due to the pandemic, but the company is now planning to initiate the process again.
Stable income play
CVS is a stable income play with several years of consistent dividend increases. While not the highest yielder around, it does offer a solid dividend yield of 2.27%.
However, a mediocre yield is better than nothing. While CVS is no Dividend Aristocrat, and it froze payments for four years to pare down debt following the Aetna acquisition, it things got back on track in February with a 10% increase.
Takeaway
CVS Health reported strong results for the third quarter, driven by growth across its core business segments. The company is in the process of implementing several strategic initiatives that position it well for continued success in my view. CVS has been working to transform its business in recent years, and I have faith in its growth potential in the primary care space.
