The market has been more pessimistic about CVS Health (CVS -0.65%), whose shares have crashed 28% in the last 12 months, falling significantly more than the broader market. The S&P 500 index lost just 12% over the same period, while The Health Care Select Sector SPDR Fund (of which CVS Health is a constituent) fell only 7.4%.
However, savvy investors do not necessarily share a similar pessimistic view about healthcare services and retail company. Admittedly, it raises the mouth-watering prospect of buying up a few shares of CVS for relatively cheap if the long-term growth story of the business is intact.
But just because you can jump into an investment that's become cheaper doesn't necessarily mean that you should. Let's go through the arguments in favor of buying it now, and ones that takes the opposite position, so you can assess whether CVS Health a good pick to help meet your investing goals.
Why CVS could be a good pick for some investors
There are a few reasons to think CVS will be a good stock to own for the next few years, starting with its ongoing forays into administering primary care services from its roughly 9,000 pharmacy locations and providing health insurance via its subsidiary Aetna. In total, its different segments yielded $322.5 billion in revenue for 2022, and it generated $13.4 billion in free cash flow (FCF), a 175% increase from a mere five years ago.
As the company increases the number of different healthcare needs its customer base can address by visiting its pharmacies, it's hard to see how its top (and eventually bottom) line will do anything other than grow. The question, which I'll get into in just a bit, is how much growth there will be annually.
Regardless of the price boost its financial performance delivers, CVS maintains a share repurchasing policy, and in 2022, management approved another $10 billion allocation to buybacks, which will provide the share price with a nice tailwind. It also pays a dividend with a current yield of 3.3%, which isn't too bad. Given that it's paid the dividend for 105 consecutive quarters, and that it hiked the payout for 2023 by 10%, it's very likely that investors who buy the stock will continue to be able to collect every quarter.
And since the decline in its stock price pumped the dividend yield up, buying the dip is a bit more tempting than usual, as there's a chance that the higher yields will be temporary.
Buy an index fund if you are looking for wealth appreciation
As appealing as the above may sound, CVS stock is unlikely to beat the market in the long term. This is because demand for its core retail pharmacy services segment is unlikely to grow quickly. People on average are simply not going to spend 20% more on their medicines each year, even when you account for expensive new medicines entering the sales mix.
That makes it hard to find much top-line growth. Over the last 10 years, revenue grew 162%, translating into an annual growth of just 10.1%.
The picture isn't much different for its health insurance segment: Even with annual price hikes, the market for insurance isn't going to explode in size as the market is saturated with powerful competitors that have been around for longer than CVS.
For the whole company, management is predicting a maximum of only 5% top-line growth for 2023. Specifically, CVS' ongoing pivot from focusing solely on retail pharmacy services toward providing healthcare benefits could accelerate growth over the coming years.
However, all said and done, the company definitely can't grow as fast as a growth stock, or even as fast as the market itself. Moreover, there seem to be no plans to enter uncontested markets and grab market share.
So for most investors looking for share price appreciation, buying the dip will most likely mean locking up some of their money in a suboptimal investment relative to a market-tracking index fund. However, if you're interested in buying a company that pays a rock-solid dividend, it's a decent time to buy the dip. Just be aware that there's no guarantee the dividend will keep rising every year, as there have been several stretches in recent history where it remained static.
