High inflation and negative 1.4% U.S. gross domestic product (GDP) growth in the first quarter has some investors worried that the economy could be in a recession right now. Until GDP data for the second quarter is released in the coming weeks, this theory can't be confirmed or refuted.
At any rate, it's a good idea to prepare your portfolio for a recession by allocating capital to recession-resistant sectors of the economy. Demand for healthcare products and services tends to steadily grow, regardless of the state of the economy.
The pharmacy operator and health insurer CVS Health (CVS 1.15%) seems like a buy for investors looking to position their portfolios for an economic downturn. Let's dig into three reasons why.
1. Robust growth to start the year
CVS Health recorded $76.8 billion in revenue in the first quarter of 2022, which was up 11.2% year over year. What contributed to this impressive revenue growth? The answer is that each of the company's three segments turned out high-single-digit to low-double-digit revenue growth in the quarter.
The healthcare benefits segment reported $23.1 billion in revenue during the quarter, which was 12.8% higher year over year. Growing demand for Aetna's health insurance led medical membership to increase 3.8% over the year-ago period to 24.5 million at the end of the quarter. Along with health insurance premium hikes, this explains the segment's growth.
The company's pharmacy services segment posted $39.5 billion in revenue in the first quarter, which was an 8.6% year-over-year growth rate. The equivalent of 30-day prescriptions filled grew by 5.8% over the year-ago period to 567 million during the quarter. Price inflation in prescriptions filled accounted for the remainder of the company's revenue growth in the quarter.
CVS Health's retail segment generated $25.4 billion in revenue for the first quarter, which was a 9.2% year-over-year growth rate. The sale of over-the-counter COVID-19 testing kits and higher prescription volumes helped to draw more customers into the stores, leading them to buy more.
CVS Health produced $2.22 in non-GAAP (adjusted) diluted earnings per share (EPS) in the first quarter, which was 8.8% higher over the year-ago period. Higher costs prompted the company's non-GAAP net margin to fall 10 basis points year over year to 3.8% during the quarter. And CVS Health's weighted-average shares outstanding increased 0.5% over the year-ago period to 1.3 billion in the quarter. This explains why the company's earnings growth lagged its revenue growth for the quarter.
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2. Strong dividend growth lies ahead
CVS Health's solid operating fundamentals also should translate into high dividend growth in the years ahead.
This is because the stock's dividend payout ratio is expected to be 26.5% in 2022. This provides CVS Health with enough capital to execute acquisitions, complete share repurchases, and repay debt to keep adjusted diluted EPS trending higher. And the payout ratio is low enough that I believe the dividend will grow faster than earnings over the next five years. Since analysts are anticipating 5.7% annual earnings growth through the next five years, I would be surprised if CVS Health fell short of high-single-digit annual dividend growth.
Given the stock's 2.4% dividend yield, CVS Health can provide investors with a nice mix of both current and future income.
3. The stock looks to be undervalued
CVS Health's 13% year-to-date decline in its share price to $91 has made it a great pick in which to buy the dip.
The stock's forward price-to-earnings (P/E) ratio is 10.9. For context, this is well below the S&P 500 healthcare sector average of 15.9. And the company also is cheap compared to its historical valuation. Despite its stable fundamentals, CVS Health's trailing 12-month price-to-sales ratio of 0.4 is lower than its 10-year median of 0.5.
