Stock Analysis & Ideas

CVS Demonstrates Fundamentals of Business Success

I have been a fan of CVS Health Corporation (NYSE: CVS) for nearly a decade. I am bullish about the stock entering the new year.

Shares are up 50% over the past 12 months and still climbing. Wall Street analysts give the stock a Strong Buy rating, with an average price target of $113.81.

That average CVS price target suggests 8.4% upside potential.

At a Glance

CVS staff is over 300,000 office and front-line workers. CVS owns and operates 9,900 retail pharmacies/general merchandise stores in 49 states, D. C., and Puerto Rico.

Inside the stores are Minute Clinics. Minute Clinics have brought in 50 million patients since their inception.

Another strategy CVS employs to expand its footprint is piggy-backing on another top-tier retailer. CVS announced its acquisition of Target’s (TGT) 1,672 pharmacy and clinic businesses at the start of the pandemic.

TGT plans on spending $4 billion over the next several years, “to accelerate new store openings—opening up to 40 stores annually.”

CVS is opening pharmacies and clinics in new Target stores while closing 900 CVS stores. I expect the action to cost $1 billion taken as an impairment cost for lease, property, and equipment write-downs.

CVS stock has been on the higher side of stock volatility for a while. It sports a 1.13 Beta rating. The share price drifted in the high $60s and $70s in 2017 through early 2019. It slumped into the low $50s through most of 2019 following the closing of the $69 billion merger between CVS and Aetna. Aetna is the third-largest health insurance and services provider.

Looking Forward

CVS will grow and profit from the momentum of Aetna. A new study, “Health Insurance Market, 2021-2028,” predicts 5.5% CAGR growth; the market will double in dollars over these years.

The population is aging and older people order better coverage from health insurance providers. Seniors also make more visits to medical personnel. CVS’ clinics are hospitable for their locations, accessibility, drive-thru pharmaceutical pick-ups, and now insurance coverage to help process their visits.

Medicaid and Medicare Advantage plans are rapidly expanding to record enrollments through insurance exchanges. Managed care companies like CVS/Aetna are having good years.

There is every reason to believe the trend will continue. COVID makes it difficult for patients to see physicians on demand: “35% of adults say they have received health care at a retail clinic during the pandemic, while 55% say they plan to seek care there in the future.”

CVS created an employer-based COVID-19 vaccination program, diabetes, and blood pressure screenings for early detection, a woman’s health initiative, and a $100-million fund to expand digital health. The digital health initiative will put CVS/Aetna ahead of the curve when the No Surprises Act takes effect this year.   

The stock market was excited about the merger at first. The share price rose to about $76 between October ’20 and March ’21. Stocks plummeted in March when the pandemic took hold.

The merger news cushioned the CVS shares. They did not take a significant hit. The price held pretty steady and started its upswing in 2021.

Wait and See

The mood about CVS dampened somewhat in recent weeks.

Hedge funds and insiders sold shares. Funds decreased their holdings by nearly 2 million shares last quarter. Insiders sold $2.7 million worth over the last three months, but over the last six months, insiders bought more shares in more transactions (~$8.5 million more) than they sold.

CVS raised its 2022 dividend that was paid for more than a decade, to $0.55 per share at the next ex-dividend date. Yield is hardly inspiring at less than 2%. The Q3 2021 top line is $3.2 billion, and revenue was up 10% year-over-year. Free cash flow was almost $5 billion for Q3. FY 2021 earnings will be over 5% greater.

The dividend increase is fair, but raises throughout the coming years will be fairer. The earnings payout ratio has been below 30%. It hovered around mid-20% for a long time.

The next raise will bring the EPR closer to 30%. That still leaves plenty of room for increased payouts. My preference is for an increase in the dividend than for the company’s plan to buy back $10 billion in shares.

CVS reports a pop in web traffic between September 2020 (3.6 million visits) and January 2021 (9 million). That is a 13.77% increase. More impressive is the +14.17% from mobile devices.

Desktop users are likely taking advantage of the Caremark free home delivery for prescriptions, while mobile device users increase in-store traffic.


CVS shares have had significant gains over the past five years. Over 52-weeks, shares have done even better.

The future looks bright. Historically, CVS stock has been marginally volatile. The stock is undervalued. Shareholders are going to receive a bigger dividend.

CVS is employing strategies that will positively impact earnings and lift the share price. I particularly look forward to Aetna and Caremark integrating with CVS operations more effectively.

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Disclosure: At the time of publication, Harold Goldmeier did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates  Read full disclaimer >

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