Stock investors who stick around long enough are bound to experience plenty of periods of significant volatility during their investing careers. Uncertainty often brings out intense emotions of fear or greed in even the most rational investors, which results in exaggerated price swings in the short term.
But investing in stocks that consistently pay dividends can help investors to remain calm under pressure. One such stock is the health insurer and pharmacy chain CVS Health (CVS 0.26%). Unlike the S&P 500 index, which has fallen 12% year to date, CVS Health's stock has increased 3% during that time.
This raises the following question: Could CVS Health be a fit within your investment portfolio? Let's look at the stock's fundamentals and valuation to answer this question.
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An outstanding year for CVS
Last month, CVS Health shared its results for 2021. The company generated robust year-over-year results. Sales totaled $292.1 billion, up 8.7% over the year-ago period. So how did a large-cap stock like CVS Health deliver strong top line growth for its shareholders?
Rather than a single factor contributing to the company's growth, each of the company's three businesses played important roles. First, the healthcare benefits segment was able to grow its membership 0.4% year over year to 23.8 million medical insurance customers at the end of 2021. Paired with higher health insurance premiums, the segment's revenue advanced 8.7% year over year to $82.2 billion in 2021.
Second, the pharmacy services segment saw total pharmacy claims (processed on a 30-day equivalent basis) climb 6.2% year over year to 2.2 billion. This was the result of an increase in new therapy prescriptions as more patients visited doctors as well as the administration of COVID-19 vaccinations that brought in new business. Even excluding the effect of COVID-19 vaccinations, CVS Health's total pharmacy claims processed would have edged 4.2% higher against the year-ago period. This helped lead the segment's revenue 7.8% higher year over year to $153 billion in 2021.
Third, the retail segment posted $100.1 billion in revenue during the year. This represents a 9.8% growth rate over the year-ago period. CVS Health estimates that approximately 45% of the segment's revenue growth in 2021 was the result of COVID-19 vaccinations, diagnostic testing, and over-the-counter test kit sales to its customers.
Moving to profitability, CVS Health reported $8.40 in non-GAAP (adjusted) diluted earnings per share (EPS). This works out to a 12% growth rate compared to 2020. In addition to CVS Health's higher sales, the company managed to expand its non-GAAP net margin by 15 basis points to 3.8% during the year.
With the tremendous 2021 foot traffic to CVS stores (caused by COVID-19 vaccinations) unlikely to be repeated, analysts don't anticipate that the company will be able to deliver double-digit earnings growth going forward. But their estimate of 6% annual earnings growth is still respectable for a company of CVS Health's size.
The dividend is poised for growth
Recently, CVS Health declared a 10% hike in its quarterly dividend and restored its status as a dividend growth stock. This represents the first dividend increase since the end of 2016 as the company was focused on repaying debt from its acquisition of health insurer Aetna in 2018.
For context, CVS Health increased its quarterly dividend for 14 consecutive years -- often by double digits -- leading up to its acquisition of Aetna. And it seems that CVS' track record of healthy dividend growth should pick up where it last left off. That's because CVS Health's payout ratio was just 23.8% in 2021, which leaves room for the dividend to grow moderately ahead of earnings in the medium-term.
High-single-digit annual dividend growth with a market-beating 2.1% dividend yield is a recipe for success for dividend growth investors.
CVS Health is a tremendous value
CVS is a fundamentally healthy stock. And this doesn't appear to be fully appreciated by the market. Its price-to-free-cash-flow ratio of nine is significantly lower than its 13-year median of 12.3. And if that wasn't enough to prove my case, CVS Health's forward price-to-earnings ratio of 11.7 is well below the healthcare plan industry average of 15.6. This makes the stock an excellent value pick for dividend growth investors to consider buying this month.
