Healthy First: CVS Will Stop Selling Cigarettes

Will it create a trend in the healthcare industry? Walgreens and Rite Aid don't immediately follow suit.

Feb 7, 2014 at 1:23PM

Pharmacy giant CVS Caremark (NYSE:CVS) announced Wednesday that it will stop selling cigarettes and tobacco products at its 7,600 stores in the U.S. by October.  Will the move set a trend in the health care industry? How should investors play this? 

Healthy choice
In addition to gaining some goodwill among health advocates, the move by CVS indicates that the company wants to grow by promoting healthy habits and the needs of the majority of its customers, including corporations and government agencies. CVS will most likely focus on its prescription drug business and administering managed pharmacy benefits programs instead of selling something which is known to cause myriad (and expensive) medical issues. The prescription drug segment generates over two-thirds of its overall revenues. Retail merchandise, which includes cigarettes, only comprise 15% of sales.

CVS will have to make up for lost revenue, estimated to be around $2 billion annually. Total corporate revenue was $123 billion in 2012. However, since the consumption of tobacco products is on a downward spiral in this country it may not affect the company that much over the long term. As far as the short term is concerned CVS stated that the impact on EPS will be six to nine cents per share this year, a relatively minor hit. Investors shouldn't worry. 

Trend setting?
What are the other pharmacy companies doing?

At Walgreens (NYSE:WAL), prescription drug sales generated about 63% of sales for fiscal 2013, while general merchandise represented 27% of sales.  Will the company give up a chunk of its revenues to follow suit? Early indications are that Walgreens has no immediate plans to stop selling cigarettes, so it might get some backlash from the same advocates that are praising CVS.

It might be too early to judge the impact to investors, which probably would take a long time to materialize. Walgreens continues to grow though acquisitions and new stores, notably the acquisition of Kerr Drug's retail drugstores in late 2013. The company has a low long term debt to equity level of 0.22 and a reasonable 41% payout ratio so expect the regular dividend increases and share buybacks to continue.

Rite Aid (NYSE:RAD) also has no plans to discontinue cigarette sales. For the most recent quarter, slight growth in revenues ($6.4 billion from $6.2 billion in the year-ago quarter) were balanced by a decline in earnings to $0.04 per share from $0.07 in the year-ago quarter.. Rite Aide won't want to rock the already rickety boat by getting rid of tobbaco. There doesn't appear to be any incentive for Rite Aid to follow the lead of CVS either unless anti-smoking advocates ratchet up the pressure or management views the potential good press as worth the potential loss of revenue. Investors can probably expect much of the same performance --- not all that great --- going forward. 

Foolish conclusion
CVS appears to be implementing a "health first" business model by removing cigarettes and other tobacco products from its shelves. Good move. Gain some goodwill with advocates and important customers to help grow a critical segment of its business. Investors might benefit in the long run. 

Other drug store chains like Walgreens and Rite Aid appear not to be following suit. Their investors may expect much of the same performance in the future.

CVS, Rite Aid, and Walgreens will have trouble keeping up with this top stock
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Mark Morelli has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers