- Reinventing the Pharmacy business
- Services from in home infusion to quick care clinics & senior center pharmacy management
- Implementing pharmacy benefit manager services
- Positive Dividend Machine Fundamentals
A quick look at the CVS website reveals the evolution of
this former pharmacy. CVS is now CVS health. They are not just a pharmacy anymore although
with 9,600 pharmacy store locations, pharmacies remain a big part of their
business. 68,000 retail network
pharmacies and 35 specialty pharmacies complement their basic business. They have developed the pharmacy benefit manager
process to diversify their role in health care.
Moreover, they provide health care through 1,100 minute care locations
and 60+ health system affiliations.
As CVS says, it is reinventing the pharmacy business. Coram, an acquisition, is one
innovation. Coram provides infusion
services in your home. From acute care to
long term care, CVS is trying to bridge the gap between primary care needs and management
in long term facilities by acquiring Omnicare in 2015.
Overlay this strategic plan on their fundamentals and my
analysis makes this stock a candidate for my 2017 Dividend Machine target
portfolio.
Fundamentals
In this case, I am going to start with balance sheet which I
measure as D/E (debt to equity ratio.)
Readers know this is important to me.
I like to keep the risk of my stocks going out of business due to over leverage to a minimum. If D/E ratio is
extravagant as it is in companies like Clorox at greater than 9 or even Verizon
at greater than 4, risk from over leverage is real.
Current D/E (debt to equity ratio) of CVS is .7475 up from an average of about .30 in
previous years. Interest coverage has
similarly deteriorated but is still a respectable 9. Walgreens Boots has a similar trend of increased
debt over the past couple of years. Debt
was cheap so you can’t complain about driving growth with debt. The chart below presents debt coming due over
time with a lot of it due in 2045.
My take when comparing CVS’s debt to the industry and its
peers is that CVS is safe.
CVS Revenues
Let’s move onto Revenues, the mother’s milk of a company’s
ability to pay out dividends. For we
income investors, we want income and we want income that grows. If revenues are not growing you can forget
about dividends growing.
I stick with the simple connection of growing revenues don’t guarantee
growing dividends but without growing revenues, sustained dividend growth is
unlikely. A picture is worth a thousand words, therefore see the table below.
Next is dividend, dividend coverage and dividend growth
If there is one weakness for CVS it is that the dividend
yield is about 2.5%. I prefer a higher yield. I seek
something greater than the 10 year U.S. Treasury yield which today is about
2.25% so CVS does qualify.
Note their fiscal quarter ending March should be reported
the beginning of May, 2017. I will not
speculate on estimates, but price can vary and if you want a higher yield you
may want to wait for a potential pull back in price should they not meet
estimates. On the other hand, their results may be good and the price could go
up.
Future earnings estimates are presented in the graph below
(source Zacks.)
Earnings should never be less than deividends. We
want a company that covers the dividend with an adequate amount of earnings and
CVS meets that requirement. Look at the
table below and you will see a very encouraging trend. Dividend payout coverage has increased for no fewer than the past five years.
Dividend yield is o.k. at today’s price of $78.25 and
dividend coverage history is very encouraging so let’s turn to dividend
growth. CVS’s most recent dividend
increase was in January 2017. They
raised the dividend from $.425 per quarter to $.50 per quarter or a 17%
increase. There is not a dividend growth
investor who would not like that. Yet, as the chart below presents, dividend
growth is decreasing.
This slow down of dividend growth suggests to me that I will watch this holding closely
personally although in my tracked portfolios I do not buy or sell once I add a
holding. At 17% dividend growth, we have
some room to wait for revenue and earnings to pick up and stimulate greater
dividend growth. My take is the dividend is safe but the dividend growth
rate may not equal past performance.
2017 CVS’s Dividend Machine Fundamental Overview
The first table below outlines my criteria for a 2017
Dividend Machine. The second table
presents how CVS performs.
Second table shows if CVS passes the hurdles set above.
I will add CVS to my 2017 portfolio. I am hoping for a pull back but I will not wait much longer.
I will add CVS to my 2017 portfolio. I am hoping for a pull back but I will not wait much longer.
M* MoneyMadam
Disclosure: No
position but could add within the 72 hours.
