Showing posts with label CVS. Show all posts
Showing posts with label CVS. Show all posts

Sunday, August 6, 2017

High Dividend Yield or High Dividend Growth: Income Investor Dilemma

Recently I have had discussions with some friends and family members and people who email me about retiring with income that grows.   I cannot stress enough that you will need more money to live on in 20 years than you do today.   Therefore, your dividend income investing should be designed and implemented to fulfill this goal.

  • High Dividend Yield is available from quality stocks rather than bonds
  • Dividend Growth must be a consideration for a 20 year investment plan
  • A combination of high yield and dividend growth delivers the goods for income investors who expect to live at least 20 years

In this post I am revisiting the dilemma all income investors face when picking a stock.  Should I go for a stock with a high current yield or the stock with a higher dividend growth history.  We can only use history and our wits to decide if the future will mimic the past. None of us has a crystal ball.  You have the luxury of being able to find the dividend growth history of every stock under consideration.

I approach this analysis of high dividend yield or high dividend growth as an income investor who uses my stock dividends and other investment income to replace the salary I used to bring home.   There is no chance I could go back to work.  I don't particularly want to invade my principle for living expenses although there are plenty of articles out there telling me that it is ok to spend some principle provided I only take out 4%.    No, I want my investments to create enough income to live on today and in 20 years.

Mine are not the only blog posts that emphasize the need to double your income every 20 years.  I don't care what the inflation guru's report.  I now have two twenty year cycles where I can measure my fixed expenses and they have doubled twice.  I strongly encourage every retiree and every pre-retiree to write down your current fixed expenses multiply by 2 and figure out how to invest so you can create the income needed in 20 years.

Let's get to the analysis.   I have created a spreadsheet with a theoretical analysis and then I applied that technique to four commonly held dividend stocks.  I set up my spreadsheet so I can fill in the investment amount, the dividend yield, and the dividend growth rate and evaluate every stock I own and those I may want to buy.

I do not reinvest dividends in this analysis.  The theoretical analysis uses a comparison of a stock with a 2.5% dividend yield and 7% dividend growth and a stock with a 5% dividend yield but 2% dividend growth.   Take a careful look at the table below.

Notice your current income with the 5% yielder is of course much higher and stays higher than the dividend grower for about 15 years, then the dividend grower provides more income.    If you expect to hold your stock for longer than 15 years, the dividend grower is probably the better choice.

Of course you take a risk on either stock.  Some externality could make the high yielder reduce the payout.  Other factors could make the dividend grower slow the dividend growth.   This is where further study is important.  Know the industry, use your wits, look at revenue trends before you jump into either investment.

Now let's apply the analysis to two very well known stocks; stocks that have been the subject of many of my posts lately:  AT&T, symbol T is a high yield at just over 5%.  Telephone's stock price has been stuck a bit lately.  They can cover their dividend through free cash flow even though their debt has expanded.  

Telephone's 10 year dividend history shows an average 1.3% annual dividend increase.  I am using their most recent dividend increase of 2% for this 20 year analysis.   Telephone is trying to build growth in a very competitive and changing industry.   Only you can decide to buy T or not.  But if you do buy T and you expect to keep it for a while, take a look at your projected income in the table below.

Also included in this table is CVS Health, symbol CVS.  This is another stock in a changing and competitive industry.  CVS delivers only one half of Telephone's yield at just over 2.5%.  However, their long term dividend growth is huge (see the chart below.)  I used their most recent dividend increase of 17% as what I expect for the next 20 years.   Again, only you can decide if CVS is the right stock for your portfolio but if you do buy CVS, the table below is helpful at seeing how much income to expect from this dividend grower.

Comparative Table of Dividend Income:  Telephone a high yielder versus CVS a dividend grower.

Notice it only takes about five years for the big dividend increases from CVS to overtake the big yield delivered by T.   Project out 20 years and the difference is quite remarkable: $1,900 per year from CVS versus $280 from T.    I cannot predict with confidence that CVS is going to continue this dividend growth performance but they have done it for 10 years and that says a lot.

Comparative Table of Dividend Income:  NHI a high yielder versus LMT a dividend grower.

CVS is pretty extreme at 17% dividend growth rate so I selected two additional stocks for analysis.  National Health Investors has been a Dividend Machine a few times and I own it.  It is a high yielder at just about 5% but dividend growth is also decent at 5%.

I look for 4% dividend growth in my personal portfolio.  Four percent will deliver a solid double of my income in less than 20 years and is well above current estimated levels of inflation at about 2%.

Lockheed Martin is a very expensive stock and it too has been a Dividend Machine whose stock price has soared.   Ordinary investors who are not planning to use covered call options should not be embarrassed to buy fewer than 100 shares of a stock.   In this case I use 15 shares of LMT  or $4,427.85 for the analysis to keep the comparisons fairly even.   Lockheed Martin has a current yield of only 2.47% but has delivered an average of 33.33% per year in dividend increases.  What have they done for us lately?  LMT's most recent dividend increase was 10.30% and that is what I am using for this analysis.


Notice in this comparison it takes 13 years for the dividend grower LMT to catch up with the high yielding NHI.   The difference at the end of 20 years is not as powerful as the CVS, T comparison but it is a difference of $175 per year.  That just might cover a cost of specialty coffee in 2037.


Income investors have few choices today for creating the income we need to replace our salaries.  We need enough today to pay our bills but we also need income growth to cover the inevitable increases in our fixed expenses.  You are not going to get income growth using bonds.   Real estate is not an asset I cover here.  Dividend stocks are a very good way to secure current income and to get income growth.

The analysis uses similar investments in each of the four stocks and the theoretical projections. When projecting out 20 years, dividend growers out perform high dividend yield.  I personally will not just invest in growers.  I use a spreadsheet to look at a combination of stocks.

Lets say you invested in each of these four stocks for a total of about $16,000.  You have two high yielders and 2 high growers.   Your first year income would be $591.46 for a yield of  3.69%.   In 20 years your income would be $3,473.32 per year.  That is an increase in income of 48.64% and a yield on your original investment of 21.7%. 

I think we could live on that income and can rest better if you put pencil to paper or keyboard to spreadsheet and know what to expect.

M* MoneyMadam


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Friday, April 28, 2017

CVS at $82

I hate to chase a stock.  I am chasing CVS.  You may recall that I decided to add it to the 2017 portfolio but I have not yet pulled the trigger.

This is where I was better at buying for my clients than for me.   When a client decided to buy a stock, the first thing I did after the meeting or phone call was to place that order.  You have discretion as an adviser but that can cause nothing but trouble.   For my own money, I can prevaricate hoping to get my stock at a lower cost.

Buying at the right price is important and $82 is max for me for CVS because that translates to a yield under 2.5%.    Since I have committed this stock to the portfolio, Monday, I will put in an order for CVS at $82.  I will let you know how it goes.  I would prefer $80 as this is a 2.5% yield.  For the portfolio, I will pull the trigger tomorrow one way or the other.

M* MoneyMadam

Disclosure:  Will add within 72 hours.



The risks of buying before earnings. CVS down a bit today. So I personally sold $82.50 May 19 calls on my $82.50 buy and put in a buy at $79.90. Working the portfolio. In the 2017 Portfolio, I have to stick with the buy. M*


Placed a buy on open order for CVS which filled at $82.04. Updated 2017 portfolio is displayed below.

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Tuesday, April 18, 2017

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.  


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.

M* MoneyMadam

Disclosure:  No position but could add within the 72 hours.


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