M* Money Madam : CVS reinventing the pharmacy business and my next 2017 Dividend Machine

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.