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Why CVS Health Corporation Jumped 22% in the First Half of 2021

By Brett Schafer - Jul 15, 2021 at 2:21PM

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The retailer raised its full-year 2021 earnings guidance.

What happened

Shares of CVS Health (CVS 1.66%), one of the largest pharmacy chains in the world and a top 10 U.S. retailer by revenue, saw shares of its stock advance 22% through the first half of 2021, according to data from S&P Global Market Intelligence. The company raised its full-year 2021 guidance and saw its valuation rise along with most other stocks in the S&P 500 market index.

So what

In its first-quarter earnings update, CVS raised its full-year adjusted operating income range to between $15.9 billion and $16.1 billion compared to the $15.5 billion-to-$15.7 billion range it gave at the end of 2020. Management also boosted 2021 adjusted earnings per share guidance from between $7.39 and $7.55 to between $7.56 and $7.68. The stock jumped in the days following the news, accounting for much of CVS' stock gains so far in 2021.

A pharmacy pick-up counter.

Image source: Getty Images.

CVS is one of the largest and most mature businesses in the world. Over the last 12 months, it has generated over $270 billion in revenue and $15.4 billion in cash flow from operations. This stability and steady cash generation allow CVS to pay a healthy dividend (the stock currently yields 2.43%). It also started the year trading at a dirt cheap price-to-free cash flow (P/FCF) just north of seven. CVS does have $60 billion in debt on its balance sheet, most of which came from its acquisition of health insurer Aetna, which will eat up some of the future cash flow instead of getting distributed to shareholders.

CVS Price to Free Cash Flow Chart

In future years, CVS plans to further merge Aetna and its retail pharmacy business, creating a more vertically integrated healthcare offering. But it is also making small improvements to help improve the profitability of its stores. For example, in May CVS announced 150 new in-house store brands, ranging from beauty products to food and drinks. In-house or first-party items carry better profit margins for retailers, so adding more of these items to its stores should help CVS improve its consolidated margins.

Now what

With a market cap of over $100 billion in a fairly mature and low-growth industry, CVS Health does not look like a stock that can offer huge returns for investors going forward. However, with a stable dividend, consistent cash generation, and a durable set of pharmacy and health insurance assets, this looks like one of the best low-risk stocks out there. Its valuation is still dirt cheap even with the stock up 22% year to date, making CVS a great candidate for any risk-averse investor's portfolio.

Brett Schafer has no position in any of the stocks mentioned. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.

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