CVS Health Corp. (CVS, Financial), a leading retail pharmacy, beat analysts' expectations for third-quarter earnings, but the stock price fell sharply on Monday after the earnings announcement before recovering on Tuesday. As the possibility of Amazon.com Inc.’s (AMZN, Financial)Â entry into the pharmacy space keeps weighing on the company, the stock’s performance had been lackluster, with the one-year return reading -3.8%.
The current dividend yield of nearly 3% makes CVS an extremely attractive investment opportunity. But let's take a closer look at its financial strength and moat to understand if the company really deserves a place in your portfolio.
CVS is a well-established brand in the U.S., operating 9,700 retail locations, more than 1,100 walk-in health care clinics, a dedicated senior pharmacy care business serving more than one million patients per year and it's a leading pharmacy benefits manager with nearly 90 million plan members. The scale is quite massive, and CVS nearly addresses all the needs in patient care, something a new entrant will find extremely hard to replicate.
For the third quarter, CVS reported net revenues of $46.2 billion, 3.5% higher than last year. Nine-month net revenues reached $136.380 billion, up from $131.555 billion last year. A growth rate above 3% is nothing to complain about when you are making more than $150 billion in annual revenues in one of the most mature segments of the market.
At the end of third quarter, CVS Health had $23.38 billion in long-term debt and $2.485 billion in cash on hand. The company allocated $245 million to interest expenses, but with operating profits coming in at $2.499 billion, putting 10% of operating profits toward interest makes the debt level extremely manageable.
CVS paid $1.539 billion in dividends over the first nine months of the year. The operating profit during the period was $6.409 billion, while net income was $3.335 billion. CVS paid just 24% of its operating income and 46% of net income as dividends. As a result, it is not surprising CVS was able to increase its 2016 dividends by more than 20%. The company looks set to provide another double-digit dividend increase both this year and next year.
The sheer strength of the company's cash flow, coupled with a healthy balance sheet, make CVS’s current dividend and debt extremely manageable, which will allow the company to continue raising its dividends over the short to medium term.
The market has certainly overblown the fear of Amazon entering the pharmacy business and hurting CVS Health’s future growth prospects. Even if Amazon were to enter the space, it will be very hard for the company to compete with the retailer's established logistical chain and physical presence.
The stock price has gone nowhere in 2017, and there is a good chance the stock will remain under pressure until the market gets over the Amazon threat. At the current yield, CVS is an extremely attractive dividend investment.
Disclosure: I have no positions in the stock mentioned above and have no intention of initiating a position in the next 72 hours.
