Opportunities abound in today's volatile stock market. After a dismal performance over the past year, shares of America's health insurance stocks are trading at prices we haven't seen in years.
I'll admit that health insurance benefits management isn't the sort of business that excites the average person's imagination. The reliable cash flows they can throw off, though, really get the blood pumping for folks focused on retiring with a large stream of passive income.
Right now is an especially good time to load up on one health insurance stock that stands out from the pack. Shares of CVS Health (CVS +0.66%) have tumbled about 30% from the peak they reached last summer. Here are three reasons the stock is a screaming buy right now.
NYSE: CVS
Key Data Points
1. An above-average dividend that's getting even better
Shares of CVS Health offer a 3.2% dividend yield. This is a much better starting point than the 1.7% yield that the average dividend-paying stock in the benchmark S&P 500 index offers at the moment.
In 2018, CVS splashed out on a $78 billion acquisition of Aetna, its health insurance benefits-management business. The company paused dividend payout raises for a few years to help pay down the debt it took on to make the acquisition.
Merging its chain of retail pharmacies and its pharmacy benefits-management business is working out so well that CVS Health has already started hiking its payout again. Since 2021 the company has raised its payout by 21%, and we can look forward to more rapid raises ahead.
The company met its dividend commitment last year with just 22% of the free cash flow generated by its business. This means there's plenty of room for a big raise next year too.
2. Vertical integration
Way back in 2007, CVS Health acquired a pharmacy benefits-management (PBM) business that is now the country's largest with over 110 million plan members. The pharmacy-services segment contributed $7.4 billion in operating income last year. That was 7% more than in 2021, and it's the company's most profitable segment at the moment.
Instead of paying a PBM to manage prescription drug benefits on its behalf, CVS Health can negotiate discounts and rebates with drug manufacturers on its own from a position of strength. Prescription drug costs get a lot of attention from the public, but CVS Health understands that spending on physician and clinical services is more than double the amount Americans spend on drugs.
Aetna collects monthly premiums from around 35 million people, and recent acquisitions will significantly reduce payments to providers that CVS Health doesn't employ directly. In March, CVS Health acquired Signify Health, a network of more than 10,000 clinicians spread throughout all 50 states.
In February, CVS Health announced its intention to acquire Oak Street Health, (OSH +0.00%). If the deal closes as expected this year, CVS Health will be the new employer of around 600 primary care providers working out of 169 medical centers.
NYSE: OSH
Key Data Points
3. CVS Health stock is trading at bargain prices
This company is already enormous, so expecting rapid growth year after year isn't very realistic. At recent prices, though, you can buy the stock for just 8.5 times forward-looking earnings expectations. At this low multiple, investors can realize market-beating gains over the long run even if the business simply holds steady.
The U.S. population isn't just getting larger, it's getting older. From 2010 through 2019 the number of people over the age of 65 soared by 34.2%, and they're going to need heaps of healthcare. As America's population increases and gets older, healthcare spending and CVS Health's business will more than likely grow as well. Buying this unstoppable stock at its knocked-down price and holding on for the long run is a relatively safe move that could lead to market-beating gains.
