Certain demographics are incredibly important to a number of economic sectors, and that includes healthcare. With the global median age projected to rise from just under 31 years in 2020 to just over 36 years by 2050, demand for healthcare services is bound to grow as well. Leading health insurer and pharmacy chain CVS Health (CVS -0.65%) is poised to cash in on this favorable demographic in the future.
That suggests growth in CVS Health's future. But is the stock a buy for value-oriented investors? Let's delve into the health of CVS Health's fundamentals and its valuation and see if an answer presents itself.
There's a growing demand for CVS Health's various services
CVS Health is an incredibly well-established business. For one, 85% of Americans live within 10 miles of a CVS Pharmacy location. Second, the company serves more than 100 million customers each year through its pharmacy benefits manager brand, Caremark, and its health insurance brand, Aetna.
CVS Health's revenue increased 9.5% year over year to $83.8 billion in the fourth quarter. What was behind the large-cap company's impressive revenue growth during the quarter?
The healthcare benefits segment posted $23 billion in total revenue, which was 11.3% higher than the year-ago period. More consumers enrolled in healthcare plans with Aetna, which led medical membership to grow 2.5% year over year to 24.4 million. Along with premium increases that were passed onto customers, this performance explains how revenue rose in the quarter.
Pharmacy services segment revenue jumped 11.2% over the year-ago period to $43.7 billion. The segment's total pharmacy claims processed edged 3.1% higher year over year to 600.4 million. Coupled with growth in more expensive specialty pharmacy products, that is what contributed to double-digit revenue growth during the quarter.
Finally, the retail segment generated $28.2 billion in total revenue for Q4. For context, this was up 4% over the year-ago period. An increase in prescription volumes drew more customers into CVS Health's locations, which is what pushed revenue higher.
CVS Health's non-GAAP (adjusted) diluted earnings per share (EPS) grew by 0.5% year over year to $1.99. The company's non-GAAP net margin fell by just over 30 basis points versus the year-ago period to 3.1%. Thanks to its share repurchase program, CVS Health's weighted average diluted share count was reduced by 0.5% year over year. These factors are why the company's adjusted diluted EPS grew at a slower pace than total revenue in the quarter.
Strong demand for CVS Health's services and acquisition activity is expected to translate into a positive future for the company: Analysts believe that its adjusted diluted EPS will compound at a 5.7% growth rate annually over the next five years.
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A safe and market-beating dividend
CVS Health's 2.7% dividend yield is meaningfully above the S&P 500's average 1.7% yield. And if an above-average yield isn't enough, the company's dividend growth has been impressive over the last 10 years: Its quarterly dividend per share has nearly tripled from $0.225 in 2013 to $0.605 in 2023.
CVS Dividend data by YCharts
More dividend hikes like the most recent 10% boost should lie ahead for shareholders. This is supported by the fact that it is projected CVS Health's dividend payout ratio will be just over 27% in 2023. That leaves the company with the funds needed to invest in future growth projects, execute share repurchases, and reduce debt.
The stock is a great value
Like the broader market, CVS Health's stock hasn't fared well in the past year: Share prices have retreated 14% during that time. The stock's forward price-to-earnings (P/E) ratio of 9.7 is well below the healthcare plans industry average forward P/E ratio of 14. This sell-off has arguably made CVS Health an obvious pick for investors seeking value and dividend growth.
