During a webinar I followed, about worldwide investing through the eyes of a mutual fund manager, I discovered a new company (for me) with some interesting looking statistics. This was one of the stocks in their top 5 holdings. It made me curious about this stock.
It is a stock in the health care industry. And as I wrote in an earlier post, I believe this will be the sector to invest in in the (near) future. The baby boom generation is getting older. And with becoming of age, your health needs more attention. Therefore more people are buying more medicine/drugs. So investing in this sector is in my opinion a wise decision.
This analysis is on CVS Health Corporation (CVS).
Company (from google finance): CVS Health Corporation, formerly CVS Caremark Corporation, is a pharmacy healthcare provider in the United States. The Company has three business segments: Pharmacy Services, Retail Pharmacy and Corporate. Pharmacy Services provides pharmacy benefit management (PBM) services, including plan design and administration, formulary management, discounted drug purchase arrangements, Medicare Part D services, mail order, specialty pharmacy and infusion services, retail pharmacy network management services, prescription management systems, clinical services, disease management services and medical spend management. The Pharmacy Services business operates under the Caremark, CarePlus CVS/pharmacy, CVS/caremarkTM, CVS/specialtyTM, RxAmerica, Accordant, SilverScript, Novologix and Coram names. As of September 30, 2014, the Retail Pharmacy Segment includes 7,779 retail drugstores, online retail pharmacy websites, CVS.com and Onofre.com.br, 17 onsite pharmacy stores and retail healthcare clinics.
Can I explain this to a 10-year old? What Does This Company Do? You can go to this company to get the medicine the doctor prescribes to you when you’re ill. Or you can go to their website and order your medicine online. It is the biggest American pharmacy company!
Dividend Aristocrat: CVS is paying Dividend for more than 12 years in a row. It’s number 270 on the CCC-list from David Fish. And therefore it is not a Dividend Aristocrat, but a Dividend Contender. They are a two star stock on Morningstar.com. Because CVS is only a Dividend Contender, it is a fail on the Polliecode!
Dividend Yield > 2.5%: The dividend Yield of CVS is 1.36%. This is above the industry average of 0.8%. And spot on their 5 years average. The Yield is below the requirements of the Pollie-Code, and therefore it failed the second Pollie-code.
Dividend payout <70%: The dividend payout is roughly 36%. This is below the maximum ratio. This also means that they can keep those dividend increases coming for a long time. Great! That’s what we DGI’s want. So passed for this point.
DGR 1 year > 0%: Okay here comes the impressive piece! The dividend growth rate for 1, 3, 5 and 10 years are 22.2, 30.1, 29.3 and 23.4. With a 3-years average over 30%. This is very impressive! Especially in relation to their payout ration. It is way above the requirements of the Pollie-code, so it is a pass.
P/E-ratio < 15: CVS has a current P/E ratio is 25.7. And is way higher then their 5 years average (16.2). I couldn’t find an industry average. This metric is above the requirement of the Pollie-Code. Therefore this is a fail.
EPS > 0: The EPS is 4.97. So SWK also passed the sixth Pollie-Code
ROE > 10%: Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. The current ROE is 12.2%. This is another pass.
Market Cap. > 100M: No problem at this point. The Market cap. Is more than $ 116.137 Mil. You guested it already: Another pass.
Chowder Rule > 12: Named after “Seeking Alpha” member Chowder. This is a method of identifying candidates for purchase based on a combination of yield and (5-year) dividend growth rate. When the sum of these elements is above 12%, the company presents an attractive entry point (8% for utilities). When the figure is above 8%, an existing holding is still considered worthy of being retained. The current Chowder rule is 30.7. This is therefore of course a pass on the Pollie-code.
Stock price 52wk high-25%: The 52 wk. high and low are: 105.46 and 72.43. This means that CVS will be in my buying zone when the stock price is below 97.20 ((105.46-72.43)*0,75 + 72.43). At this moment CVS is trading for $101.64. Therefore it is a fail on the Pollie-Code.
Beta: I think it’s important to have low Beta stocks in my portfolio. This helps to have a stable income all the time, even when the market has a rapid decline. The Beta for CVS is 1.05.
Conclusion: When I look at the analysis, CVS passed 6 out of 10 from the Pollie-code! The Pollie-code failed at the Dividend Aristocrat, P/E-ratio, Dividend Yield and the current Stock Price. At this moment, in my humble opinion, the stock is trading in the overvalued zone.
Despite a not so high score on the Pollie-Code, CVS is a great stock! At this moment they have a low yield, but with a very high dividend growth rate. And I rather have a stock with a low yield and a high growth rate, then a stock with a high yield and a low growth rate. But this is something to talk about in one of my next posts.
At this moment for me CVS is priced a little bit too high. It can (and maybe will be) a nice addition to my portfolio. I will put CVS on my watch list for my Vrijheid Fonds.
What are you – the readers, thoughts on CVS Health Corporation Inc.? Is it a buy, do you own it?
Please comment on my analysis and thanks for stopping by!