In an effort to be transparent, I like to keep my readers up to date on my portfolio changes. By keeping an open book of my portfolio and changes to it, I hope to generate discussion so others can see how I put my investing philosophy into practice. An added bonus is that it makes me a better investor as I have to rationalize my investing decisions to others. This helps take some of the emotion out of my investing. For the most up to date portfolio changes follow my twitter account as I will usually tweet the day I buy or sell stocks and then follow up with a blog post sometime later.
CVS Health Corp. purchased
On December 21, 2016, I purchased shares of CVS Health Corp. (NYSE:CVS) (CVS Trend) for $79.41 + commission. At $80, the stock yields 2.5%, which was the minimum dividend yield I wanted before investing in this company. I started looking at the company more seriously in November 2016 when it was in the mid to low-70s. I was interested, but I wanted at least a 2.5% dividend yield. At the time, I was expecting the next dividend announcement to be an increase, but wasn't expecting an 18% raise so I waited for the announcement on December 15th before re-evaluating and then ultimately buying shares. If the price were to drop again to $72, I'd consider picking up some more shares. I typically average into a full position over time.
CVS is an integrated pharmacy healthcare provider that operates primarily in the US. It has three business lines: Pharmacy Services, Retail Pharmacy and Corporate. It is one of the US's leading pharmaceutical companies and it has the largest pharmacy chain in the US. It fills over 1 billion prescriptions per year.
I purchased this stock for a number of reasons:
- CVS has a wide moat rating from Morningstar.
- CVS is a Dividend Contender with a dividend streak of 14 years. The 14th consecutive dividend increase was announced on December 15, 2016. The quarterly dividend of $0.425 was increased 18% to $0.50.
- The company is financially strong. It has an A+ financial strength rating from ValueLine, a BBB+ credit rating from S&P and a Baa1 rating from Moody's. I typically look for B++ or higher from ValueLine and BBB+/Baa1 or higher from the rating agencies.
- The stock is officially in the healthcare sector, but I consider it to be a mix of healthcare for its pharmacy services and consumer defensive for its retail pharmacy operations. Both healthcare and consumer defensive sectors are under-represented in my portfolio, so I've been looking to purchase in these sectors.
- High dividend growth expectations and a reasonably cheap valuation.
High dividend growth expectations
I expect high long-term annual dividend growth in the low-to-mid double-digits range. The payout ratio is in the 30s, which leaves ample room for dividend growth and the company has a long term 10% adjusted EPS growth target. Please note that this is a long-term target and that I'm not expecting 10% growth in EPS in 2017.
January 10, 2017, JP Morgan Healthcare Conference Presentation Slide 27
The high EPS growth and the low payout ratio should allow the dividend to grow in the low double digits over the long term. ValueLine has come to a similar assessment as it is estimating 16% average annual dividend growth over the next 3-5 years.
CVS Health Corp. ValueLine Estimates
The company also has a history of strong dividend growth as it has three, five and 10-year average annual dividend growth rates of 23.6%, 27.7% and 27.0%, (Source: December 2016 US Champions List) respectively. With its recent 18% dividend increase signaling that it intends to continue high dividend growth, I feel comfortable estimating long-term annual dividend growth in the low-to-mid double-digits range. Now, it's not the >20% rates of the past, but I still consider it to be high dividend growth.
From a valuation perspective, I like to invest in a reasonably cheap dividend growth stocks. At $80, I consider CVS Health Corp. to be reasonably cheap from a historical standpoint based on its current dividend yield of 2.5%. In the past decade, it was very rare for CVS to have a dividend yield over 2%.
CVS Health Corp. Historically Low Valuations
Morningstar also has it at a 4 star rating right now, which is another indication of a reasonably cheap price. Morningstar's 5 star price is $72.80 or less and its fair value estimate is $104.00.
I'm happy with my purchase of CVS Health Corp., which is why I purchased a 50% position. I'm hoping the price drops some more and I'm able to pick up a 25% position at $72 and the final 25% at $64. Whether this happens is anyone's guess, but I like to have a clear plan before initiating a position.
While the starting dividend yield of 2.5% is historically quite high for the company, it is at the lower end of the range that I typically target. If the price drops and I'm able to buy more shares at a lower price point, my yield on cost will go up which is what I'm hoping for. I've noticed a few high-quality dividend growth healthcare stocks going on sale in the past few months also with low starting dividend yields. For instance, I purchased Novo Nordisk (NVO Trend) (NYSE:NVO) in November 2016, and I'm watching Medtronic plc (MDT Trend) (NYSE:MDT) in hopes that it drops to around $68. Cardinal Health Inc. (CAH Trend) (NYSE:CAH) is also on my radar, but I'm waiting for a drop to $63. As I'm finding it hard to add higher yielding healthcare stocks to my portfolio right now, I'll have to offset this with higher yielding stocks in other sectors.
Related article: Portfolio Update - Novo Nordisk Purchased
What do you think of my recent purchase of CVS Health Corp.? What other names are on your radar in the healthcare sector?
Disclosure: I own shares of CVS Health Corp. and Novo Nordisk. You can see my portfolio here.