Shares of CVS Health (CVS -0.64%) hit a high-water mark about a year ago, but it's fallen around 27% from its all-time high. Now, dividend growth investors are sniffing around this one-of-a-kind healthcare stock for signs of a bargain.
Is CVS Health a smart stock to add to your dividend growth portfolio? Let's look at some key reasons to buy the stock now to find out.
Reasons to buy CVS Health now
At the moment, CVS Health stock offers an above-average 3% dividend yield. If the years ahead resemble its past, adding shares of the stock to a portfolio now could lead to heaps of passive income in your retirement years. The company has been able to raise its dividend payout by 169% over the past decade.
You're probably familiar with CVS Health's enormous chain of pharmacies but this is more than a simple retail business. CVS Health also owns a pharmacy benefits manager business that boasts over 110 million plan members. Providing the benefits it also gets paid to manage is a lucrative position to be in. This is why, in 2018, the company took another big step in this direction by acquiring Aetna, a leading health insurance benefits manager.
CVS Health froze its dividend payout in place for a few years to help pay down debt following its $78 billion acquisition of Aetna. Now that the dust has settled, we can see it was worth every penny. Over the past five years, the amount of free cash flow CVS Health generates has risen 175% to $13.5 billion annually.
CVS Dividend data by YCharts
The company resumed annual dividend bumps last year and has since upped its payout a whopping 21%. Despite two years of rapid raises, the company needed just 22% of the free cash flow operations generated over the past year to meet its dividend commitment.
More primary care profits
Pharmaceutical companies get a lot of negative attention for high drug prices but they're relatively small contributors to America's $4.3 trillion annual healthcare bill. Primary care providers, or at least the businesses that employ them consume a much larger share.
To bring more of the healthcare benefits Aetna members receive in-house, CVS Health recently announced an agreement to acquire Oak Street Health (OSH) for $10.6 billion. The transaction is expected to close later this year. When it does, CVS Health will have a scalable senior-focused primary care model that already operates in 169 medical centers across 21 states.
In addition to its recent agreement to acquire Oak Street Health, CVS Health agreed to acquire Signify Health last September in a transaction valued at around $8 billion. Signify Health has a network of 10,000 clinicians across all 50 states.
A buy now
CVS Health shares are currently trading at just 9.3 times the midpoint of management's earnings expectation for 2023. At this low valuation, investors can realize market-beating gains even if the business stagnates.
Stagnation for CVS Health seems highly unlikely. The impending acquisitions of Signify and Oak Street could make CVS Health a much larger player in America's enormous market for primary care services. If rapidly growing dividend income is what you're after, adding some shares of CVS Health to your portfolio now looks like the right move.
