Source: CVS Health.
Last year was a bit of a bland one for investors in CVS Health (CVS -0.17%). A 3% gain in share price put it ahead of the S&P 500, it wasn't strong enough to keep pace with Walgreens Boots Alliance (WBA -0.11%), the company's chief rival.
The lackluster stock performance is all the more surprising when considering that CVS' management team provided upbeat financial guidance for 2016 and even raised its dividend payment by a strong 21%. The company's dividend payout ratio now stands at a respectable 1.74%.
But after the recent dividend bump, is the company now out of gas, or will it be able to once again raise its dividend in 2016?
Growth drivers
CVS Health has several irons in the fire that should help it grow its revenue and profits in the year ahead. CVS Health's retail pharmacy business got a huge boost from its recently completed $1.9 billion takeover of Target's (TGT -0.71%) pharmacy business. That one deal added 1,672 new stores to its vast empire, which is a nice addition to the 7,900 stores it had before the deal closed. The deal should also give the company an avenue for future growth, since CVS Health will operate all pharmacies in new Target stores.
CVS Health also continues to add more of its in-store clinics -- known as MinuteClinics -- to its existing footprint. There are currently more than 1,000 MinuteClinics in operation, and management believes it should have more than 1,500 in place by 2017.
CVS Health is also making a strong push into the long-term-care pharmacy business. In 2015 it spent $12.9 billion to acquire Omnicare, a leading provider of pharmacy services to the assisted-living and long-term-care facility markets.
Add these opportunities together, and CVS is expecting that it should be able to deliver adjusted earnings-per-share growth of at least 11.25% in 2016, with profits falling between $5.73 and $5.88 per share.
Growing profit tends to lead to growing dividend payments, so these growth initiatives are a positive sign.
Past dividend growth
CVS Health has a solid history of increasing its dividend payout every year, another good sign for investors looking for another bump in 2016. Those increases add up quickly, too, and the company's recent 21% bump means it has risen by 240% in the past five years alone.
Payout ratio
Dividend sustainability should always be a prime concern for income-focused investors. One way to tell if a company's dividend is safe is to look at its cash payout ratio, or the percentage of a company's free cash flow that's used to fund the dividend. In general, the lower the payout ratio is, the safer the payment.
After factoring in the recent dividend increase, the company's dividend will cost it $1.70 per share each year. With 1.11 billion shares currently outstanding, that means the dividend will cost the company about $1.9 billion per year. Over the past 12 months the company generated more than $6.1 billion in free cash flow, so the company's cash payout ratio is a very sustainable 31%.
A potential curve ball?
One potential pitfall that CVS Health investors need to keep an eye on in 2016 is Walgreen Boots Alliance's pending takeover of Rite Aid (RAD 25.83%). The deal hasn't been completed yet, and the Federal Trade Commissions and Rite Aid shareholders both need to approve it, but if it goes through, it would combine the No. 2 and No. 3 players in the pharmacy space and could pose more of a competitive threat to CVS Health.
Is the dividend poised for growth?
With history and the company's financial statements on investors' side, I'd say CVS' dividend appears poised for further growth. With the stock's current modest yield and the likelihood of more dividend increases on the way, income-focused investors might want to consider adding a few shares of CVS Health's stock to their portfolio.
