Shares of CVS Health Corp. (CVS, Financial) have fallen nearly 30% over the past 18 months as investors continue to show concern over the competition Amazon.com Inc. (AMZN, Financial) could pose going forward. CVS Health has responded by buying health insurer Aetna Inc. (AET, Financial) for a reported $69 billion. This move seeks to transform CVS Health into a fully integrated health care business, but analysts are reading into it a lot more than the average investor.
Amazon is expected to move into the $560 billion prescription drug market soon, following applications for wholesale pharmaceutical licenses. Analysts now believe this could be a huge threat to mainstream drug stores given Amazon’s massive footprint in the e-commerce market.
When the news first broke in October that Amazon was planning to break into the prescription drug market, shares of CVS Health nosedived 17%, from about $81 per share on Oct. 5 to about $67 on Nov. 6, before rebounding to the current level of around $75. The recovery began shortly after CVS announced its plans to buy Aetna.
The stock trades miles below its multiyear high of $115 per share, which was achieved in July 2015. Considering Amazon is about to become a rival, it is hard to see how CVS Health could rally its way back to over $100 in the foreseeable future. This means now may not be the right time to buy the stock for the purpose of capital gains.
For those interested in dividend growth stocks, however, CVS Health might be the perfect candidate for in-depth analysis. Dividend stocks are suitable investments for those saving for retirement, but there are a few insights even the average investor should look out for to trim the list of potential candidates. For retirees, growing savings is one of the principal elements when building portfolios, and dividend stocks and other fixed-income assets can play a crucial role.
So what makes CVS Health a suitable candidate for retirement savings?
There are three important traits to look for when identifying a good dividend stock. The first is, of course, the dividend yield, which relates the dividend paid to the price of the stock. Currently, CVS Health has a dividend yield of about 2.67%, which is not bad for a drugstore stock that trades around $75 per share.
The next trait to look for is dividend growth. CVS Health has increased its annual dividend over the past nine consecutive years and projections indicate this will continue into the foreseeable future. The company operates in the relatively crisis-immune health care sector, which again puts it in the category of defensive stocks. Companies with predictable dividend payments make good dividend investments. It appears CVS Health has fulfilled this requirement given its dividend growth history, as shown in the chart below.
The third characteristic to look at is the dividend payout ratio. With a payout ratio of about 35%, CVS Health has plenty of room to grow its dividend.
With the acquisition of Aetna, CVS Health might be able to resist the threat posed by Amazon’s entry into the market, which could play an important role in improving its bottom line, thereby boosting dividend growth and the payout ratio.
While CVS Health may not be suited for capital gains currently, other aspects make it an appealing choice for a unique class of investors.
Conclusion
Amazon will be on CVS Health’s heels, make no mistake. The pair should make an intersting rivalry in the coming years. Will CVS Health fold like other traditional retail stores have done over the past several years? Or will it embrace the challenge and soldier on, maintaining its good dividend history? As we have witnessed with the likes of Wal-Mart (WMT, Financial), Target (TGT, Financial), J.C. Penney (JCP, Financial) and others, adapting to change is crucial.
Disclosure: I have no positions in any stocks mentioned in this article.
