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Wolf's Corona Discounts: CVS Health

May 08, 2020 9:27 AM ETCVS Health Corporation (CVS) Stock19 Comments


  • The coronavirus and its associated effects continue to ravage the global economies and our societies, making certain that markets remain in turmoil for some time.
  • Buying quality cheap is, as such, more important than ever, and to not allow yourself to be lead astray by unsustainable yields - or worse yet, companies.
  • CVS Health remains one of the better choices in the Pharma/Healthcare sector - even with other companies also being attractive.

Pharma/Healthcare as a sector has been a relatively stable investment sector over the course of the coronavirus crisis, as long as you've stuck more to quality than not. At times, near-peerless qualitative firms such as United Health Group (UNH), Quest Diagnostics (DGX), and Medtronic (MDT) were even decent buys to consider for your portfolio. At today's valuations, I don't see that as being the case.

Instead, we find opportunities if we accept a small bit of "less" quality in the form of slightly lower dividend safety and credit ratings, moving into what I consider to be second-class safety stocks. It is here we find the triad of undervalued stalwarts I find interesting (among others) in the sector today. These are Bristol-Myers Squibb (BMY), Cardinal Health (CAH), and CVS Health (NYSE:CVS).

Today, we're going to highlight CVS as a good prospect for investment. Because technically, as I view valuations for these companies, CVS Health is the most undervalued of the three, coming in at a yield in between BMY and CAH.

Let's give an update on just what makes this company investable.

CVS Health - How has the company been doing?

The fact is that in terms of the nominal stock price, the company is higher than when I wrote about it in the summer of last year. There was a period when - along with almost everything else - CVS recovered somewhat, but this was swiftly halted by coronavirus, driving the share price back down into the 60s and 50s. However, before we look at what we can expect, we should look at how CVS managed 4Q19 and FY19 - this is relevant to see just how the company delivered on promises to shareholders back from about a year ago.

During FY19, the company delivered:

  • EPS of $7.08, 3 cents above the

This article was written by

Wolf Report profile picture

Wolf Report is a senior analyst and private portfolio manager with over 10 years generating value ideas in European and North American markets.

He is a contributing author for the investing group iREIT on Alpha where in addition to the U.S. market, he covers the markets of Scandinavia, Germany, France, UK, Italy, Spain, Portugal and Eastern Europe in search of reasonably valued stock ideas. Learn more.

Analyst’s Disclosure: I am/we are long CVS, DGX, BMY, CAH, UNH. 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.

While this article may sound like financial advice, please observe that the author is not a CFA or in any way licensed to give financial advice. It may be structured as such, but it is not financial advice. Investors are required and expected to do their own due diligence and research prior to any investment. I own the European/Scandinavian tickers (not the ADRs) of all European/Scandinavian companies listed in my articles.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (19)

Zucks profile picture
One reason for the low payout ratio is CVS’s commitment to freeze the dividend in order to pay down debt for a total of two years.
Where do you have the 2 years from?
At the moment CVS froze the dividend for more than 2 years already and will likely continue until 2021 by its own guidance. Makes a 4 year freeze.
Two more years bud
I'm currently reading Charkes Payne's book, Unstoppable Prosperity. Last evening, using his strategy, I came to the same conclusion you put forth. Reassuring that CVS is indeed a BUY!! Thank you!
Long CVS. I'm buying at current levels as a dividend growth stock as I think they'll start to raise the dividend meaningfully after paying down debt. Barring a market setback it should be up near $100 in 18-24 months.
Larry Hall profile picture
I have a fair amount of CVS in portfolio percentage. I did expect at least a modest surge in stock price after the earnings report. For most companies, such 'beats' would yield at least a 5% jump. Not with CVS. Then we read about debt and the dividend issue (no raises), and it starts to make sense. It starts to look like CVS will have to over-perform in those areas because the market simply does not like the stock. And that gives me pause about how much I own.
BM Cashflow Detective profile picture
The free cash flow margin is regularly at a safe 5% and Mr. Market offers CVS permanently for sale. Good long term buying opportunity.
jara-mill profile picture
This is a defensive stock that belongs in a retirement account (preferably a Roth IRA) and in these times CVS was long lines due to pandemic and panic buying, and Minute Clinics, 24-hr pharmacy, recent purchase of Aetna and grocery shopping.

Didn't have any gun powder for when it dropped back into the low 50s but will buy more when it gets into the mid to low 50s. Long Consumer Value Stores (aka CVS).
I hope it never goes that low again.
I completely agree with the case for buying/holding CVS. It is a cash generating machine which easily supports the dividend, has the capability to pay down its debt and is forward-looking in use of its stores as health care hubs.
Having said that it has been quite under-valued for well over a year and despite generally positive earnings it has continued to get cheaper. It feels like an obvious buy yet it continues to seriously lag the market. Not sure why this is the case but not convinced it is going to realize the expected upside given how many opportunities there have been for it to rally only to have it continue to under-perform.
Long CVS.
mlvSA profile picture
i was little skeptical about the high debt they carry with aetna purchase but after watching them from sidelines and their capacity to service the debt looks doable . i still believe they overpaid aetna it to fend off amazon and rushed into purchase. Aetna and CVS were long time partners on the PBM side (and i know from the fact i worked on the pilot project for integration with cvs/aetna way before they made the purchase) .In short ,the transition will be seamless.
i was looking to purchase in lower 50s and will add if it gets there.
shine4u profile picture
I have been watching them with disbelief. CVS debt is a concern, and their merchandising is not great. They have not developed the health themes in food or supplements. Pass it on to them if you know them. Great report.
There are only two reasons why this stock is so cheap.
1.Due to high debt, they don't do buybacks, if there were buyback we would be already at $77 now.
2.High debt ratio, it will be so much cheaper and less interest expense from next year.

CVS path is very clear, with lower debt, higher EPS, buybacks, higher dividend from 2022.

My price prediction is around $90-$95 end of 2022.

Yes I am long
Free money approaching negative rates.
Dividend Ambassador profile picture
The Wolf is right. CVS is one of the best values available on the current market. It is a fat 60 mph pitch lobbed right over the center of the plate. I guess my only quibble is that I think of CVS as a very high quality company and NOT second tier quality. CVS’ long term record of consistently growing earnings at a double digit pace per year on average over the medium term, the long term and the very long term (5, 10, 20, 30 years) is absolutely outstanding. The corporation has also exhibited an ability to transform itself over and over again to find new markets and new profitable lines of business. This is also outstanding. Remember, first CVS was a retail category killer of mom and pop pharmacies, then a PBM, and now it is becoming the first nationwide retail healthcare provider and insurer. Perhaps now becoming category killer for primary healthcare medical practices??? That is mighty impressive.
You didn’t mention anything about their debt, interest expense or the fact they haven’t raised their dividend in 3+ years. All things that will prevent it from trading at the P/E you used for your assumptions.
XRTrader profile picture
@DRL1965 You're not considering that they are paying down debt aggressively, and clearly have the cash flow to do so. CVS has said they will not raise dividend until they reach their target leverage ratio. But, by the time these things happen, the market would have priced them much higher.
They have alot of debt maturing next years, after 2024 it is low untill 2040 or 2045 where it will be high again (probably the Aetna acquisition). The main reason it is low shareprice is because entire health industry was in a 5 year bear market. Also healthcare s got hammered.
They can take care of the debt payments. After 2023 it is a divided growth but also a revenue growth business with less debt & payout ratio. They will have billions of free cash flow each year.
I bought before earning and I think it will trade sideways until elections or next bullmarket.
I am not worried about debt because cashflow will be fine.
Low valuation and decent dividend CVS, good company long term.
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