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Is CVS Health a Great Dividend Stock?

By Zhiyuan Sun - May 10, 2020 at 6:51AM

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A pharmacy giant possesses an enticing dividend yield and is well protected from the impacts of COVID-19 -- here's why.

As of May 8, the ongoing coronavirus pandemic has unleashed havoc across the U.S., infecting over 1.3 million Americans and killing nearly 80,000. Due to measures to contain the virus nationwide, over 20 million Americans lost their jobs in April alone. All major stock indices have been hammered into bear markets characterized by constant volatility.

As a result, investors are looking for stocks with more stability compared to the overall market, that provide essential services during the outbreak, and that distribute dividends for predictable income. One dividend-paying healthcare stock to consider is CVS Health (CVS 0.71%)

How the company is responding to COVID-19

For starters, CVS is classified as an essential business during the pandemic and has seen demand for prescription drugs and its own healthcare services skyrocket. In fact, the company is hiring over 50,000 employees to meet increased demand and is offering free home delivery services for prescriptions. This is good news for its core revenues. In addition, the company plans to do COVID-19 testing at 1,000 of its U.S. locations, with the ultimate goal of processing up to 1.5 million tests per month. 

While some have argued CVS and other pharmacies may face widespread disruptions in their supply chains, the numbers suggest otherwise. During the past two months, only 15 drugs have been added to the Food and Drug Administration's (FDA) shortage list. Everywhere, Americans needing access to essential goods and medicine are still largely able to obtain them. This is in stark contrast to the problems facing the retail sector and speaks in favor of CVS' resilience during this catastrophe.

Young female pharmacist smiling.

IMAGE SOURCE: GETTY IMAGES.

So is the dividend safe?

Since 2010, CVS has witnessed consistent revenue growth year over year, either via organic growth or acquisitions, as with the case of acquiring Aetna in 2018 for $69 billion. Indeed, the company's sales have more than doubled in the past nine years. In the same period, CVS' net income grew from $3.42 billion to $6.63 billion. 

Although the company's profit margin may be low, a far more important metric to look at is its payout ratio. Currently, CVS' payout ratio stands just south of 30%. In other words, only about three-tenths of the company's profits are being used to sustain its dividend payout. This means it has a large safety cushion in case its business faces headwinds. As of now, the company's stock boasts a tempting 3.34% forward dividend yield. This is certainly very good, considering treasuries are yielding next to nothing, and the average S&P 500 stock yields approximately 2%.

One more metric investors may wish to look at is the company's ability to finance debt. CVS currently has over $80 billion in long-term debt and capital leases, compared to more than $25 billion in cash and investments, resulting in net debt of $62 billion. Meanwhile, the company's earnings before interest, taxes, depreciation, amortization, and rent amounted to $19 billion last year. Having a debt-to-EBITDAR coverage of 3.26 times is more than enough to sustain its financial obligations.

In terms of dividend growth, CVS has also done a good job. In the past five years, the company has grown its dividends by 12.70%, or an average of 2.87% annually. In all, the company's dividends are well protected by its profits and possess further growth potential, leading to a great dividend stock for investors to consider. 

What about its role in the opioid crisis?

Recently, the company received a favorable ruling from a U.S. appeals court in Cincinnati that pharmacy chains will not face allegations that the mere action of dispensing opioids contributed to the opioid crisis. As a result, the company will face significantly fewer liabilities than that of manufacturers and marketers of opioids. There are currently over 2,600 cases of opioid litigation nationwide against players in the sector. 

Takeaways for investors

Dividends aside, CVS also has plenty of room for capital appreciation. The stock trades for less than nine times earnings and 0.3 times sales, and may even meet its forecasts this year for revenue growth as more and more Americans are visiting pharmacies during these tough times.

Furthermore, the stock's beta, or its price movement compared to major indices, stands at 0.73. This means should we encounter another sell-off, CVS stock price should fall by one-quarter percentage less than that of the S&P 500. In all, due to the defensive nature of the business, its financial strength, and recent reduction of risk from opioid lawsuits, this will be a stock that healthcare investors looking for a steady stream of income do not want to miss. 

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CVS Health Corporation Stock Quote
CVS Health Corporation
CVS
$93.19 (0.71%) $0.66

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