Is It Time to Throw In the Towel on CVS Health Stock?

Warren Buffett once said, "Our favorite holding period is forever." Many CVS Health (CVS 1.49%) shareholders probably bought the healthcare giant's stock thinking that they might be able to buy and never sell. But even Buffett has sold his fair share of stocks well before forever arrived. Is it time now to throw in the towel on CVS Health stock?

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Too many problems

Even though CVS Health beat consensus analysts' estimates in the last several quarters, there have been reasons for concern. Prescription growth has slowed. The company's retail business performed at the low end of management's expectations in the third quarter, due in part to lower customer traffic. CVS Health isn't seeing as much growth from its acquisitions of Omnicare's and Target's (TGT 1.03%) retail pharmacies as expected. 

If those were CVS Health's only problems, we probably wouldn't be talking about whether or not to sell the stock. The bigger issues lie ahead. 

Walgreens Boots Alliance (WBA 3.69%) appears to be simply out-hustling CVS Health. Come Jan. 2017, all members covered by Prime Therapeutics will have to move their business from CVS to Walgreens. That's because Walgreens struck a deal in August with Prime, the country's fourth-largest pharmacy benefits manager, which is owned by 14 Blue Cross and Blue Shield plans.

Another CVS Health loss to Walgreens takes effect even sooner. Active-duty and retired military members and their families covered by Tricare won't be able to use CVS Health beginning Dec. 1. Walgreens again took business away from its main rival.

The Prime Therapeutics and Tricare defeats caused CVS Health to slash 2017 earnings guidance. Unfortunately, these losses are particularly damaging because they represent 40 million of CVS' most profitable prescriptions.

Wall Street was already expecting lower growth over the next few years than CVS has enjoyed during the last five years. Depending on what happens in Washington, expectations could be lowered even further.

President-elect Donald Trump and the incoming Republican-controlled Congress have pledged to repeal Obamacare. If fewer Americans have health insurance coverage as a result of the demise of the health reform legislation, it could have a negative impact on CVS Health and other pharmacy chains. 

Fighting on

Despite these real challenges, plenty of opportunities remain. The company expects average annual earnings growth of 10% over the next several years. That's not great compared to previous expectations -- but it's not horrible.

CVS Health plans to begin offering a suite of bundled services to other pharmacy benefits managers (PBMs) and health plans. These offerings could include MinuteClinic services, infusion services, and Omnicare long-term care services. The company also has kicked off an initiative to increase efficiency and lower costs. This effort especially focuses on leveraging technology investments to cut costs.

Sometimes getting kicked in the teeth brings out the inner fighter. That could happen with CVS Health. The company might have become somewhat complacent. Walgreens' wins should fire up CVS Health's competitive drive.

Larry Merlo, CVS Health's CEO, hinted at the potential for acquisitions in his comments during the company's third-quarter earnings call. It's not hard to envision a smart strategic acquisition helping spark share prices once again. 

As for a potential repeal of Obamacare, the impact on CVS Health depends on the details. Trump has spoken of his desire to replace Obamacare with something better. It's possible that the effect on CVS won't be all that bad. 

Look at the big picture

Investors should look at the big picture when it comes to CVS Health (or any other stock, for that matter). The company's dividend is an important part of that picture. CVS Health's yield stands at 2.27% right now. CFO David Denton underscored the company's commitment to increasing dividend payments each year in his remarks during the third-quarter call.

If you assume that CVS Health will grow earnings per share at its target 10% rate and that the share price moves in tandem, the total return including dividends could easily be close to 13% per year. Could investors do better? Probably, but that's not a bad total return. 

The stock is also cheaper than it's been in a while. I don't see it going too much lower, since most (if not all) of the negative factors impacting 2017 are already baked into the price. Throw in the towel on CVS Health? My view is to let the company keep fighting and see what happens.