Yesterday, CVS Caremark (CVS) announced that its Board of Directors has approved a new share buyback program for up to $6 billion. The share buyback program can be done via open market repurchases, privately negotiated transactions, and/or derivative transactions. It also said that this program was expected to take effect over a multi-year horizon.
CVS is one of the biggest pharmacy healthcare providers in the US. It supplies its services via pharmacy benefit management, mail order, and specialty pharmacy division. Its shares are trading at about $47.71; total market capitalization is $60.7 billion. So the company intends to repurchase as much as up to nearly 10% of the current market capitalization. Since 2007, CVS has been repurchasing its shares at an increasing rate. Over the last 5.5 years, it has spent $8.3 billion in share repurchases. The increasing level of treasury stock in the balance sheet is the indicator of the buybacks.
During the same time, CVS has delivered consistent operating performance. The revenue keeps growing rapidly, whereas the operating income and the net income are quite consistent.
In the last five years, the annualized growth of revenue, operating income and net income are 7%, 5.72% and 5.6% respectively. At the end of 2011, CVS's EPS was $2.57 per share. In addition, in August the company raised FY 2012 EPS guidance to an adjusted EPS range of $3.32 to $3.38, up from its previous guidance of $3.23 to $3.33. If it achieves EPS of $3.32 per share, CVS will experience an impressive EPS growth of nearly 29.2% year over year.
CVS is famous for paying growing dividend in the last 10 years. In 2002, it paid out $0.12 per share in dividend. In 2011, the dividend per share was $0.5. Annualized dividend growth in the last 10 years was nearly 15.4%.
Furthermore, CVS is a constant cash generator. In the last 5 years, it has generated positive and stable cash flow from operations and free cash flow.
Currently, its TTM operating cash flow is $6.8 billion, its TTM free cash flow is $4.82 billion, and its TTM EBITDA is $8.31 billion. With the current enterprise value of $68.48 billion, CVS is trading at 14.2x EV/FCF and 8.24 EV/EBITDA.
With the total market capitalization of $60.8 billion, the market is valuing CVS at 16.9x P/E, 1.6x P/B and 9.2x P/CF. How about its competitors, including Walgreen (WAG) and Express Scripts Holdings (ESRX)? Here is the comparative valuation table:
We can see that the most expensive is ESRX, then CVS. WAG seems to be the cheapest with only 12.3x P/E and 7.9x P/B. However, the battle on the payment rates between WAG and ESRX has driven many WAG's customers into CVS. In addition, the recent $6.7 billion deal to acquire 45% stake in Alliance Boots gives WAG more risks. First is the major exposure to Europe during its recent turmoil time. Second, WAG will take on billions of debt to finance the deal, weakening its balance sheet.
For CVS, the $6 billion repurchase plan combined with the optimistic EPS expectation of growing 29.2% year over year leave CVS with good prospects going forward. Furthermore, with its history of paying consistently growing dividend and the ability to generate stable cash flow, CVS can be a good stock for diversified income portfolio.