CVS Health (NYSE: CVS)
QVI Research Report | Updated Coverage | August 2023
CVS Health is a dividend-paying large-cap stock in the health care sector’s services industry.
CVS offers health care benefits, pharmacy services, and retail/long-term care services.
The company’s performance has underperformed its sector and the broader market due to challenges with its pivot to a 100% healthcare business model.
In this updated research report, QVI changes its rating on the stock in the Concentrated Portfolio.
When referencing this report, premium (paying) subscribers can access their Quality Value Investing (QVI) Glossary of Investing Terms and Metric Targets. Unless noted, all data presented is sourced from Seeking Alpha Premium as of the market close on August 7, 2023, and intended for illustration only. If reading this in your email, consider viewing in the Substack App for a more inclusive experience.
CVS Health Value Proposition
QVI Research Report’s value proposition section provides a brief synopsis of the company’s business model, major-exchange listing, stock symbol, market capitalization, and dividend-paying status. In addition, it defines the competitive advantages of a company’s products or services to its customers compared to the industry, including the stock’s historical performance vs. the sector and market.
CVS Health (NYSE: CVS) is a dividend-paying large-cap stock in the health care sector’s services industry. CVS was added to the QVI Concentrated Portfolio on January 18, 2018, at a dividend- and split-adjusted $67.36 a share.
CVS Health Corporation provides health services in the United States. It operates through Health Care Benefits, Pharmacy Services, and Retail/LTC segments.
The Health Care Benefits segment offers traditional, voluntary, and consumer-directed health insurance products and related services. It serves employer groups, individuals, college students, part-time and hourly workers, health plans, health care providers, governmental units, government-sponsored plans, labor groups, and expatriates.
The Pharmacy Services segment offers pharmacy benefit management solutions, including plan design and administration, formulary management, retail pharmacy network management, mail order pharmacy, specialty pharmacy and infusion, clinical, and disease and medical spend management services. It serves employers, insurance companies, unions, government employee groups, health plans, prescription drug plans, Medicaid managed care plans, plans offered on public health insurance and private health insurance exchanges, other sponsors of health benefit plans, and individuals. This segment operates retail specialty pharmacy stores; and specialty mail-order, mail-order dispensing, and compounding pharmacies, as well as branches for infusion and enteral nutrition services.
The Retail/LTC segment sells prescription and over-the-counter drugs, consumer health and beauty products, and personal care products; and provides health care services through its MinuteClinic walk-in medical clinics. This segment also distributes prescription drugs; and provides related pharmacy consulting and other ancillary services to care facilities and other care settings.
The company was formerly known as CVS Caremark Corporation and changed its name to CVS Health Corporation in September 2014. CVS Health was initially incorporated in 1996 and is headquartered in Woonsocket, Rhode Island, USA.
QVI’s value proposition elevator pitch for CVS Health:
One-stop healthcare store for insurance, primary care, and prescriptions.
Performance vs. Sector and Market
The chart below illustrates CVS’s performance against the Health Care Select Sector SPDR® Fund ETF (NYSE: XLV) and the SPDR® S&P 500 ETF Trust (NYSE: SPY) since being added to the QVI Portfolios in January 2018.
For example, CVS has underperformed its sector and the broader market in total return during the coverage timeframe, primarily due to its widely reported challenges with executing its pivot to a 100% healthcare business model.
Due Diligence Resources
For a more in-depth analysis of the all-important value proposition, visit CVS Health’s investor relations webpage and its most recent Form 10-K Annual Report submitted to the US Securities and Exchange Commission or SEC.
QVI’s value proposition rating for CVS Health: Neutral.
CVS Total Return vs. XLV and SPY CVS Health Corp (CVS) Total Return: 8.21% Health Care Sel Sec SPDR ETF (XLV) TR: 65.06% SPDR S&P 500 ETF Trust (SPY) Total Return: 75.78% Since January 18, 2018 (as of August 7, 2023)
CVS Shareholder Yields
QVI Research Report’s shareholder yields section uncovers the equity bond rate of the company’s common shares. It aims to quantify the yields on earnings, free cash flow, and dividends to measure how the targeted stock compares to the prevailing yield on the 10-Year Treasury benchmark note.
Earnings and Free Cash Flow Yields
CVS’s earnings yield traded below the QVI targeted floor at 3.08%, as demonstrated in the chart below. On the contrary, at 18.35%, CVS’s free cash flow yield traded well above the threshold.
As inverse valuation multiples, the weighted shareholder yields suggest that CVS trades at fair value to earnings and at a discount to free cash flow. QVI will further explore valuation multiples later in this report.
CVS Health offers a respectable forward dividend yield of 3.20%, supported by a conservative 27.01% payout ratio, thus indicating a dividend rate with plenty of room for additional annual increases.
CVS yielded 3.59% from an annual payout of $2.42 on a split- and dividend-adjusted cost basis of $67.36 per share on January 18, 2018, the initial date of QVI’s real-time purchase of a slice of the company. Thus, the yield-on-cost basis was +39 basis points [bps] above the forward yield.
Average of Shareholder Yields
Quality Value Investing takes the average of the three shareholder yields to measure how the stock compares to the prevailing yield of 4.10% on the 10-Year Treasury benchmark note. For example, the average shareholder yield for CVS was 8.21% or +411 bps above the 10-Year and 8.34% or +424 bps above the Treasury yield when using QVI’s yield-on-cost basis.
QVI’s shareholder yields rating for CVS: Bullish.
CVS Shareholder Yields CVS Health Corp (CVS) Price: $73.91 CVS Health Corp (CVS) Earnings Yield: 3.08% CVS Health Corp (CVS) Free Cash Flow Yield: 18.35% CVS Health Corp (CVS) Dividend Yield: 3.20% One-Year Trailing (as of August 7, 2023)
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CVS Health Fundamentals
QVI Research Report's fundamentals section measures the performance strength of the company's senior management by analyzing revenue growth, net profit margin, and returns on equity and invested capital.
Revenue Growth and Net Profit Margin
Per the chart below, CVS Health had positive three-year annualized low-double-digit revenue growth of 10.27%, outperforming the 7.00% median growth of the health care sector.
Farther down the income statement, CVS Health had a trailing three-year low single-digit net profit margin of 0.86% but outperformed the sector's median negative net margin of -6.48%
Returns on Equity and Invested Capital
CVS Health's management produced a trailing three-year return on equity or ROE of 4.05%, well under the targeted threshold but outperforming the sector's median negative ROE of -42.08%.
Stock buyback programs often elevate ROE. For example, CVS Health's board of directors authorized up to $10 billion of repurchases in late 2022. However, are they buying back the shares at value prices on behalf of shareholders?
At 2.27%, CVS Health's three-year return on invested capital, or ROIC, was well below the QVI threshold yet outperformed the sector's median negative ROIC of -22.90%, indicating that its senior executives are competitive capital allocators.
Nevertheless, CVS Health's ROIC didn't cover its weighted average cost of capital, or WACC, of 5.33%. (Source of WACC: GuruFocus).
Positive revenue growth, tempered by low yet sector-beating profit margins and returns on equity and invested capital, suggests that CVS Health's management continues its long-tailed transition to a neighborhood health services provider.
QVI's fundamentals rating for CVS Health: Neutral.
CVS Returns on Management CVS Health Corp (CVS) Revenue Growth: 10.27% CVS Health Corp (CVS) Profit Margin: 0.86% CVS Health Corp (CVS) Return on Equity: 4.05% CVS Health Corp (CVS) Return on Invested Capital: 2.27% Three-Year Trailing (as of August 7, 2023)
CVS Valuation, Risks, and Investment Thesis
Next, QVI dives into the valuation multiples, downside risks, and overall investment thesis of CVS Health (CVS), including potential catalysts. So, let’s dig further after reading the required disclosures and background information.
Disclosure: I/we have a beneficial long position through the direct ownership of common shares of CVS in our family portfolio. I wrote this report myself, and it expresses my own opinions. I am not receiving compensation for it other than from Substack paid subscriptions. I have no business relationship with any company whose stock is mentioned in this article.
Additional Disclosure: Quality Value Investing by David J. Waldron’s primary ticker research reports are for informational purposes only. The accuracy of the data cannot be guaranteed. Narrative and analytics are impersonal, i.e., not tailored to individual needs nor intended for portfolio construction beyond his family portfolio, which is presented solely for educational purposes. David is an individual investor and author, not an investment adviser. Readers should always engage in their own research or due diligence and consider (as appropriate) consulting a fee-only certified financial planner, licensed discount broker/dealer, flat fee registered investment adviser, certified public accountant, or specialized attorney before making any investment, income tax, or estate planning decisions.
About the Writer
David J. Waldron is the contributing editor of Quality Value Investing and author of the international-selling book Build Wealth with Common Stocks: Market-Beating Strategies for the Individual Investor. David’s mission is to inspire the achievement of his readers’ financial goals and dreams. His work has been featured on Seeking Alpha, TalkMarkets, ValueWalk, MSN Money, Yahoo Finance, QAV (Australia’s #1 Value Investing Podcast), Money Life with Chuck Jaffe, LifeBlood with George Grombacher, The Acquirer’s Multiple, Amazon.com, Barnes & Noble, Apple Books, the BookLife Prize, and Publisher’s Weekly. David received a Bachelor of Science in business studies as a Garden State Scholar at Stockton University and completed The Practice of Management Program at Brown University.
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CVS Valuation Multiples
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