CVS Health Corporation (NYSE:CVS) has managed to outperform the market over the past few months, as investors rightly see the stock as a reliable investment with solid dividend prospects. Due to its unique qualities in a highly speculative market landscape, there could be additional room for CVS stock to move higher. However, as there appears to be limited upside from a valuation standpoint, I remain neutral on the stock.
In the current highly unstable market environment, individual equities with more uncertainty attached to them have a higher chance of being dumped by investors. Alternatively, the more secure an investment appears these days, the better it will be treated by investors.
CVS Health falls in the latter category, as its recession-proof cash flows are attracting increased investor interest. Specifically, while the S&P 500 has dipped by about 5% over the past three months, shares of CVS have actually advanced by 2.3%, clearly outperforming the general index.
CVS Stock’s Recession-Proof Business Model Drives Results Higher
CVS Stock is well-positioned to keep producing resilient cash flows even if the economy were to move into a deep recession. With the company being one of the leading pharmacy benefits managers, featuring approximately 110 million plan members, CVS’ performance is mostly uncorrelated with the underlying condition of the general market.
CVS’ necessity-type business model is what differentiates it from most companies these days, as was demonstrated during the pandemic when its performance was not disturbed. In fact, the company’s revenues reached new record levels last year. Additionally, based on the company’s performance over the first half of 2022, it looks like CVS’ top and bottom line records are about to be broken again.
In Q2 2022, the company continued to grow conservatively, as CVS’ revenues increased 11% to $80.6 billion. Profitability improved as well, as earnings-per-share rose to $2.23 compared to $2.10 in the prior-year period.
Most of the company’s revenue growth was powered by an 11.7% increase in Pharmacy Services, largely driven by larger pharmacy claims volumes, growth in specialty pharmacy, and higher pricing.
In my view, this particularly exemplifies both CVS’ power to stay untouched by lofty inflation levels and its prospect to even profit from rising prices due to most medications being essential for the consumers that need them. This may not sound too moral, but it’s admittedly an advantage for the company, and we cannot deny it.
The Retail/LTC division also performed nicely. Total revenues grew 6.3% in Q2, primarily pushed higher by improved prescription and front-store volumes.
Other positive developments for the company included total same-store sales growth in CVS’ Retail segment of 8.0%. This was driven by pharmacy sales growing by 7.6%, prescription volumes growing by 3.1%, and front-store sales growing by 9.4%. CVS also recorded total year-over-year membership growth of 3.8% to 24.4 million. Once again, to me, these metrics display just how robust the company’s operations and results can be in any economic environment.
With CVS’ latest results reaffirming the company’s prospects to perform well during a highly inflationary environment, management raised its Fiscal Year 2022 GAAP earnings-per-share outlook range to $7.23 to $7.43, from $6.93 to $7.13 previously. The midpoint of $7.33 implies a new all-time high EPS for CVS.
CVS Stock Has a Reliable Dividend
Another factor that has been critical in sustaining CVS’ shares higher these days is the company’s proven ability to maintain and grow its dividends. CVS hasn’t cut its dividend since 1996. Dividend-per-share hikes have only taken place whenever the company reaches a fresh, loftier profitability plateau to guarantee that payouts will remain well-covered should it face headwinds.
This was the case between Fiscal Years 2017-21 when payouts remained steady. With net income levels snowballing lately, CVS increased its dividend by a decent 10% to a quarterly rate of $0.55 last December.
This increase thickened investors’ confidence in the dividend and the company’s commitment to increase it over time. Further, the midpoint of management’s EPS outlook suggests a payout ratio of 30.0%, which could support another strong increase this year. Overall, CVS’ 2.2% dividend yield is a nice complement to the company’s investment case considering its already broad qualities.
Is There Further Upside to CVS Stock?
With shares already hovering at quite elevated levels, a reasonable question is whether shares can keep moving higher – especially if the indices keep moving lower. In my view, the stock is likely to keep beating the S&P500 as long as uncertainty prevails. Still, it’s hard to argue that there is meaningful upside at CVS’ current valuation levels.
The midpoint of the management’s EPS outlook suggests a P/E of 13.6. This is not a rich multiple, but it doesn’t imply a discount either. Sure, CVS is a quality company with reliable cash flows. Still, revenues and profits are likely going to keep growing in the single digits over the long run, as has been the case historically.
Thus, a multiple in the low teens is well justified. I don’t believe the stock deserves a higher premium, and therefore I don’t see further upside from here. The “easy gains” have likely already been made.
Is CVS Stock a Buy or Sell?
Turning to Wall Street, CVS has a Strong Buy consensus rating based on 10 Buys and two Holds assigned in the past three months. At $122.33, the average CVS stock price projection suggests 23% upside potential.
Takeaway – CVS Stock is a Reliable Investment, but Fully Valued
CVS exhibits a recession-proof business model, which should keep enabling the company to produce robust results even during challenging market environments. Its latest quarter portrayed this, with earnings-per-share destined to reach a new all-time high this year. That said, CVS stock appears to be fully valued, which indicates that there is likely no “easy” upside ahead. Accordingly, I am neutral on the stock.
