Promises made, promises kept. That was one big theme in this year's investor day presentation from CVS Health (CVS 1.23%). Recently, the healthcare giant laid out its plans for the years ahead, and the expectations aren't entirely unreasonable.
If you've been thinking about adding this dividend-paying stock to your portfolio, now looks like a great time to act for a lot of good reasons. Here are three of the most important ones.
1. Dividend raises ahead
CVS Health is generally a reliable dividend raiser, but the company froze its payout in place in 2017 to help with the $69 billion acquisition of Aetna in 2018. CVS Health took on a lot of debt to become a healthcare benefits manager and wisely decided to freeze dividend payments in place until its financial leverage ratio reached a more comfortable level.
The company's a bit more levered up than it was just ahead of the Aetna acquisition. At a financial leverage ratio below 0.8, though, it's more than likely safe to show shareholders a lot more appreciation.
Effective Feb. 1, 2022, patient CVS Health shareholders will receive a $0.55 dividend payment or 10% more than they've been receiving since late 2017. Also, the company intends to return $10 billion to investors in the form of share buybacks.
At recent prices, the impending buybacks could reduce CVS Health's outstanding share count by more than 7% at recent prices. This will make it even easier to bump the payout higher in the years ahead.
2. Chance to outdo UnitedHealth
Thanks to the Affordable Care Act, private healthcare plan sponsors, Medicare, and Medicaid increasingly pay fixed rates for specific conditions. This means running patients through more tests and services than they need leads to losses on the bottom line for companies like CVS Health. It also means that coordinating primary care in a way that keeps patients healthy and out of the hospital can lead to windfall profits.
UnitedHealth Group (UNH 1.29%) doesn't bring in quite as much revenue as CVS Health, but it's been generating around twice as much net income. A large part of UnitedHealth's rise to the top can be attributed to an internal network of doctors. UnitedHealth employs or at least has a relationship with 60,000 U.S. physicians. Taking money from healthcare plan sponsors and using it to pay providers is a lot easier to manage when you employ the providers.
CVS Health employs more pharmacists than UnitedHealth, but drugs are a relatively minor expense. In 2019, National Health Expenditure data found that prescription drugs made up just 10% of America's $3.8 trillion healthcare bill that year. Physician and clinical services worked out to 21% and hospitals soaked up the largest share at 30% of total healthcare spending.
With more than 9,000 physical locations spread throughout the U.S., CVS Health has a chance to employ more of the cost-saving measures that UnitedHealth Group enjoys. At the moment, CVS Health manages 1,200 walk-in medical clinics that employ around 4,000 nurse practitioners and physician assistants. It won't happen overnight, but better coordination of primary care could make CVS Health's profit margins resemble United Health's.
3. Ability to keep raising the payout
At recent prices, CVS Health stock offers a 2.2% yield and a pretty good chance to see that payout rise into the clouds. Over the past year, CVS Health generated a whopping $15.2 billion in free cash flow and used just $2.7 billion to make payments.
With its debt load under control, the company can raise its dividend payout in line with earnings growth. Vaccine distribution revenue might slacken in the years ahead but growth ahead seems like a reasonable prediction. A steadily aging U.S. population is going to need more healthcare year after year for decades to come.