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Shares of CVS Caremark (NYSE:CVS) have steadily returned 32.81% over the past 12 months. At $47.70 per share, the stock is trading very close to its 52-week high of $48.69 achieved in July. As a shareholder, I remain bullish on CVS at this level given the company's solid fundamentals, reasonable valuations, and sustainable dividend. My view is based on the following five reasons:

1. CVS is reasonably priced to the firm's growth potential (see table below). Analysts in average forecast the firm's revenue, EBITDA, and EPS to rise by solid 2-year CAGRs of 9.3%, 9.9%, and 17.4% over the current and next fiscal years, compared to the average rates of 1.0%, 11.4%, and 7.2% for CVS' peer group consisting of its competitors such as Walgreen (NYSE:WAG) and Express Scripts (NASDAQ:ESRX). Factoring in the earnings estimate, CVS is trading at 1.1x PEG, fairly in line with the peer average of 1.0x, indicating a reasonable valuation.

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2. CVS is priced somewhat attractively relative to the firm's financial performance (see table above). Aside from the solid growth prospects, CVS also has a superior profitability as all of the company's margin measures are largely higher than the peer averages. But the firm's return on invested capital as measured by ROE and ROIC is below the par. In addition, CVS assumes a low leverage relative to its peers and its LTM total debt to EBITDA ratio is only 1.1x, significantly less than the group average of 2.6x. The company also has a robust free cash flow generating capability with a LTM FCF margin of 4.4%. CVS' interest coverage rate is fairly in line with the peers, and both of the firm's current and quick ratios are slightly above the peer averages, reflecting a healthy balance sheet.

Overall, CVS has a fairly sound financials relative to its peers, but the current stock price of $47.4 only implies an on-par valuation to the 3 peer-average trading multiples (NTM EV/EBITDA, NTM P/E, and LTM EV/FCF, and assuming they are equally weighted in determining the stock value) (see table above). I believe that the stock is somewhat undervalued at this level given CVS' solid financial performance and market share.

3. Despite for the fact that the dividend yield is only at 1.4%, CVS appears to have a strong commitment and ample financial resources to continuously raise dividend payments. Over the past 11 fiscal years, annual dividend per share has been raised by a 10-year CAGR of 16% from $0.12 in FY2001 to $0.50 in FY2011 (see chart below). Moreover, since 2007, CVS' FCF has been substantially improved and annual dividend paid only represents a small portion of the annual FCF generated, reflecting an ample room for dividend hikes down the road (see chart below).

4. The company's revenue, EBITDA, and EPS estimates have experienced multiple upward revisions over the past 12 to 18 months, showing market's solid confidence in CVS' future (see below).

5. Street analysts are generally very bullish on CVS. Cantor Fitzgerald has recently initiated a buy rating for the stock with a target price at $55. Of the 25 analyst ratings, there are 6 strong buys, 16 buys, and only 3 holds.

6. The company's CIO, Stephen Gold purchased 9,516 shares at an average cost of $47.29 in July 2012, which is very close to the current stock price at $47.40.

Bottom line, CVS' valuation offers a fair margin of safety. On top of it, the 1.4% dividend yield, which is safely backed by the firm's solid free cash flows, serves as an extra bonus for the investment. As such, I recommend establishing a long-term position for CVS.

Comparable analysis and valuation tables are created by author, all other charts are sourced from Capital IQ, and all financial data is sourced from Thomson One, Capital IQ, Morningstar, and Finviz.com.

Source: CVS Caremark Offers Good Value For Dividend Investors