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

As America’s aging demographics continue to put a strain on Federal entitlements (Medicare most of all), government price caps could be mandated that would blow a big hole in the value proposition of PBMs. Specifically, the idea that a PBM such as CVS can help health consumers cut costs via negotiating with medical suppliers.

Indeed, the PBM business model is coming under increased scrutiny. They are supposed to lower prices for consumers, but the industry remains quite opaque with where and how profits are moving around. I recommend reading the article I linked to if you are interested in a deeper look at PBMs’ risks. .

A second major and related threat is ongoing consolidation in the health plan industry. Specifically, as health insurance companies combine via M&A they may create their own PBM services and thus not need CVS anymore.

For example, Aetna is currently trying to buy Humana Inc (NYSE:HUM), which the Department of Justice is attempting to block on antitrust grounds. However, should the deal go through, some analysts speculate that Aetna will attempt to create a more vertically integrated business model, via an in-house PBM.

Not only would that potentially cost CVS 7% of its business as early as 2019 (via an early escape clause in its most recent contract), but it could further represent increased low cost competition that could put pressure on CVS’s PBM margins.

Finally, it’s worth touching on CVS’s latest results. CVS announced earnings on November 8 and warned that it could lose 40 million prescriptions next year. The company’s earnings guidance for 2017 missed analysts’ expectations by roughly 10%.

The company’s prescription losses are primarily driven by exclusive networks Walgreens has arranged with other players in the drug chain to let patients get their prescriptions at a discount, reducing the need for CVS’s network in most cases. Here is the slide CVS presented for its earnings call:

Dividend Safety Analysis: CVS Health

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