CVS Health Corp (CVS): A Quality Dividend Growth Stock On Sale Or A Value Trap?

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Despite the market’s recent pull back in recent weeks, the S&P 500 is still trading close its all-time high and at a historically elevated P/E multiple of 24.5.

However, that doesn’t mean that there still aren’t great bargains to be found, even when it comes to high-quality dividend growth stocks.

CVS Health Corp (NYSE:CVS) is a possible example. The company’s stock has declined 25% year-to-date, setting up an interesting investment case. CVS stock now yields 2.3%, well above its 1.4% average dividend yield over the last five years.

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Don’t let the low yield turn you off – management has increased the dividend by 25% per year over the last decade and raised the payout by 20% in 2016. The company is also a Dividend Achiever with over 10 consecutive years of dividend increases.

Find out if CVS Health could be one of the most attractive income growth opportunities available today, and if now might be a great time to add this fast-growing blue chip to your own diversified dividend portfolio.

Business Description

CVS is one of America’s most dominant healthcare players. It operates the nation’s second largest pharmacy chain (9,652 retail pharmacies in 49 states, DC, Puerto Rico, and Brazil) under the CVS, Longs Drugs, Navarro Discount Pharmacy, and Drogaria Onofre pharmacy brands.

CVS also operates as one of the nation’s largest pharmacy benefits managers (PBMs), with almost 80 million plan members who used CVS to file 1.2 billion medical care claims in 2015. CVS acquired Caremark RX for $21 billion in 2006 to become the second biggest PBM.

The pharmacy benefits business operates under the CVS Caremark, CarePlus CVS Pharmacy, CVS Specialty, Accordant, SilverScript, NovoLogix, Coram, Navarro Health Services, and Advanced Care Scripts names.

This fast-growing business segment provides vital services to employers, insurance companies, unions, government employee groups, health plans, managed Medicaid plans, and plans offered on public and private exchanges.

Specifically, CVS’s PBM business helps clients with pharmacy services such as plan design and administration, formulary management, Medicare Part D services, mail order and specialty pharmacy services, retail pharmacy network management services, prescription management systems, clinical services, disease management programs, and medical pharmacy management services

In the first half of 2016 the majority of CVS’s sales came from its PBM segment, which, thanks to a faster growth rate than its retail pharmacy business, is likely to only grow more important over time.

Business Segment % of YTD Revenue % of YTD Operating Profits
Pharmacy Services 59.6% 38.4%
Retail/Long-Term Care 40.4% 61.6%

Source: CVS Health Earnings Release

However, thanks to continued high margins on prescription refills, the retail/long-term care business remains the key profit driver; at least for now.

Business Analysis

The aging of the U.S. population represents one of the largest demographic megatrends of the coming decades and is expected to result in massive increases in medical costs. For example, Ventas, Inc. (NYSE:VTR) projects national health expenditures to grow 5.8% per year from 2014 through 2024 to reach $5.4 trillion.

To put things in perspective, consider this: between 2010 and 2029, 10,000 baby boomers will turn 65…every single day. And between 2010 and 2050 the population of those over 65 will more than double to 88.5 million, which is more U.S. seniors than the entire population of Germany.

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