CVS Caremark: Healthcare Reform, Strong Operational Excellence Drive Growth Into 2013

| About: CVS Health (CVS)

Shares of CVS Caremark (CVS) rose more than 5% over the past trading week. On Thursday, the pharmacy health care provider issued a strong outlook for 2013.

2013 Outlook

For the coming year the company expects adjusted earnings per share to come in between $3.84 and $3.98. The target implies that earnings growth is expected to come in between 13 and 17%. The guidance comes in ahead of analysts' consensus of $3.78 per share.

GAAP earning per share are expected to come in between $3.59 and $3.73.

For the full year of 2013, the company expects to generate free cash flows of $4.8 to $5.1 billion. Cash flow from operations are expected to come in between $6.4 and $6.6 billion.

CEO Larry J. Merlo commented on the performance over 2012 and the outlook for the coming year, "Going into 2012, we set challenging, yet achievable, financial targets and I am pleased to report that we outperformed those expectations. Earnings per share and cash flow are expected to be solidly ahead of our initial plan. These strong results set the stage for continued enterprise growth in 2013 and beyond."

Shareholder Presents

Besides issuing a strong outlook for 2013, the board of directors had some more presents for shareholders. The company announced a 38% increase in its quarterly dividend to $0.225 per share, for an annual dividend of $0.90 per share.

As a result of the dividend hike, the company achieves its 25% dividend payout ratio before its target date of 2015. The hike furthermore marks the tenth consecutive year of dividend increases.

Besides the dividend hike, CVS indicated that it will complete $4 billion in share repurchases during 2013. The buyback program is sufficient to retire 6.5% of total shares outstanding. CVS could retire roughly 80 million shares, or roughly 300,000 shares per trading day. The activity could make up roughly 4% of average traded daily volume of 7 million shares over the past month.


CVS Caremark ended its third quarter with $1.2 billion in cash, equivalents and short-term investments. The company operates with $10.0 billion in short and long-term debt, for a net debt position of $8.8 billion.

For the first nine months of the year, CVS generated revenues of $91.7 billion. The company net earned $2.75 billion, or $2.13 per diluted share. Full year revenues could approach $124 billion, while earnings could come in around $4 billion, or around $3.15 per diluted share.

The market currently values the firm at $61.4 billion. This values the firm at roughly 0.5 times annual revenues and around 15-16 times annual revenues.

The increase in the quarterly dividend to $0.225 per share will boost the annual dividend yield to 1.8%.

Some Historical Perspective

Year to date, shares of CVS have risen some 21%. Shares started the year around $40 per share and rose to fresh highs for the year, around $49 per share.

Between 2009 and 2011, shares mostly traded in a wide $25-$35 trading range. The returns in 2012 have send shares to fresh all time highs.

Between 2008 and 2012, CVS has boosted its annual revenues by some 40% from $87 billion in 2008 to $124 billion this year. Net earnings rose 25% to roughly $4 billion, while earnings per share rose even faster after the company retired more than 10% of its shares over the past four years.

Growth Strategy For The Future

CVS is uniquely positioned to drive growth in a rapidly changing environment. The health care industry continues to change, which is accelerated by the implementation of the Affordable Care Act ((ACA)), demographic shifts, changes in consumer behavior and technology developments.

The ACA will add roughly 30 million more insured clients, improve cost-effectiveness of care and growth in pharmacy sales. CEO Merlo commented on the growth opportunities, "We continue to believe that our goals of providing greater access and convenience, improving health outcomes and lowering overall costs align very well with the direction in which health care is headed."

Investment Thesis

CVS Caremark has seen a good year. The company is on track to surpass its own guidance, and the company expects another strong year in 2013. Shares are valued at 13-14 times earnings and the company has committed a lot of financial resources to please its shareholders, including a dividend hike and a fairly large share repurchase plan.

The company has seen a very solid performance and growth in the core retail and pharmacy benefit manager business. CVS has benefited from the continued troubles at Express Scripts (ESRX), converting many Walgreen (WAG) patients into loyal CVS Retail consumers.

Healthcare reform and the troubles at Express Scripts fuel growth into next year, and in the years ahead. The trend towards more generic medication and drugs is beneficial for CVS as well.

Shares are fairly valued at these levels. The long-term prospects for capital appreciation at CVS remain good as a result of the headwinds noted above. Investors should hold on to their shares.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.