The Company in a Nutshell
- CVS is among the largest drugstore and Pharmacy Benefits Management (PBM) companies.
- Its strategy to integrate the business vertically will give CVS a competitive edge for several years to come.
- After the Aetna acquisition, CVS continued its vertical integration with the acquisition of Oak Street Health.
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What the CEO said: What we say:Investment Thesis
CVS isn’t receiving much confidence from the market if we look to the 5-year historical trend, mainly due to disruption from Amazon. While we think the business will do well in facing AMZN, CVS is taking an interesting step in meeting its competition. We like the concept of a vertically integrated pharmacy, as we can see the innate synergies in managing both medical and pharmacy benefits. Now that the Aetna acquisition is well integrated, CVS has taken another swing at vertical integration with the acquisition of Oak Street Health, a primary care service provider for adults on Medicare. While this is an interesting transaction, it has bitten off lots to chew. It took about 5 years to see results from the Aetna acquisition, and we wonder whether it will take that long again this time around. We must admit we were surprised by the dividend increase in late 2023.Dividend Triangle
5-Yr Rev. Growth | 0.00 % |
5-Yr EPS Growth | 0.00 % |
5-Yr Div Growth | 0.00 % |
Potential Risks
In 2016, the Walgreen Boots Alliance, one of CVS’s major competitors, took two significant accounts from CVS Health, and approximately 30 million members shifted to WBA. In addition, future growth coming from COVID vaccines could be halted as we exit the pandemic. While AMZN is far from impacting the PBM market, it will affect CVS’s traditional pharmacy business model even though vertical integration with the acquisitions of Aetna and Oak Tree Health will enable CVS to remain a strong competitor. There are risks with such large acquisitions. It took several years to convince the market that CVS was going in the right direction with this strategy (Aetna). Now that its balance sheet is under control, it is going for another swing (Oak Tree). Will it be able to knock it out of the park? In the meantime, the interest charged on this new debt will be another burden. Finally, healthcare reform is a source of uncertainty, as any new regulation can affect the company’s business model. Today, supply chain disruption and inflation are headwinds that CVS must navigate.
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Financial Debt to EBITDA (TTM) | 0.00 |
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Dividend Growth Perspective
Management had kept the dividend payment flat for 4 years, indicating that they are cautious and that the company would rather put its money towards making the merger a success. After 4 years, CVS rewarded investors with a 10% dividend payment increase in Q1 2022 and another 10% increase in 2023. However, considering the recent acquisitions of Oak Street Health, it remains unclear whether CVS will keep its generous dividend growth policy. Shareholders must remain patient as this level of increase may not be sustainable moving forward. In the meantime, you can appreciate another 10% dividend increase for 2024.
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Valuation
(Data for `ddm_recent_annual_dividend` field are missing to build DDM tables)
Video Tutorial: How to Read the Stock Cards DDM Valuation
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- All financial metrics are updated weekly.
- The DSR PRO rating and Dividend Safety Score are updated quarterly.
- The analysis (investment thesis, risk potential, dividend growth perspective and DDM calculation) is reviewed every 6 months.
- The PDF format includes only comments (no metrics) and is reviewed every 6 months.