Friday, March 15, 2019

CVS getting paid to wait.

CVS is a very unloved stock on every level.  We don't like their part of pharmacy benefits, we don't like the cost of acquiring Aetna.  We are concerned about their ambitious goal of providing health care in every corner drugstore.   Zacks has a nice review:

Just take a look at some of the fundamentals of the stock, CVS. 

Debt is little high but not surprising when you consider the cost of growing.  Dividends are flat over the last couple of years but prior to that dividend growth was good.  That is a two edged sword.  We like a company that knows how to manage their cash and sometimes maintaining instead of growing the dividend is the way to go.

Earnings per share are weak but that has to do with the cost of the recent acquisition. Many analysts prefer free cash flow.  Take a look at the graph of free cash flow below and you can see the recent trend line is up.

Per share free cash flow for the fourth quarter of 2018 was $1.69 which easily covers the quarterly dividend pay out of $.50.  

Most important to me is the revenue growth.  Sales drive revenue, revenue drives free cash flow and earnings, and those dynamics end up supporting dividends.  Dividends are what I am interested in once I convince myself the company is not going out of business. 


Right after dividends, I look at call option potential.  Revenue growth can stimulate call buyers to try to get in cheap through the buying of the call option.  I like the double income potential.

I own CVS and have for quite a while.  My basis is all over the place.  I am going to add today and am immediately selling this call.

This is not my favorite stock but I own it and will continue to milk it for call opportunities while I get paid the dividend as I wait for capital appreciation and resumption of dividend growth.  At close to the low of the year ($51.93,) CVS is a value stock for me.  Some might call it a value trap but with the revenue growth, I will take my chances.

M* MoneyMadam
Disclosure:  Long CVS with calls