Shares of CVS Health (CVS -0.65%) stock recently dipped in response to a first-quarter earnings report, even though the results were mostly positive. Over the past six months, the stock has dropped around 29% despite a recent dividend raise and several encouraging signs for the future of its increasingly integrated healthcare businesses.
This stock's performance over the past six months might lead you to believe it's not a good investment, but that would be wrong. Investors who buy at recently depressed prices and hold over the long run have a great chance to realize market-beating gains.
Before we look at why this one-of-a-kind healthcare business can outperform, let's try to understand why it's down right now.
What happened to CVS Health stock?
Extra testing and vaccinations related to the COVID-19 pandemic funneled a lot of extra business to CVS Health. The unwinding of pandemic-driven demand is partly responsible for an earnings contraction that has kept the stock under pressure over the past six months.
The latest dip in CVS Health's stock price was a response to a forward-looking guidance revision. In February, the company told investors to expect earnings between $8.70 and $8.90 per share in 2023. The stock slipped after announcing its first-quarter report because the company lowered its guided range by $0.20 per share.
Investors get upset when management teams need to revise their guided ranges downward, but CVS Health has a pretty good excuse. The company recently completed two big acquisitions, and the financial impact of these is expected to pressure the bottom line by $0.35 per share. Operations have actually been performing better than expectations, which offset some of the effects of recent acquisitions.
Much more than just pharmacies
You might think of CVS Health as a chain of pharmacies, but this business is a shrinking part of this large integrated healthcare conglomerate. In fact, the company is on track to close roughly 10% of its 9,000 stores by 2024.
These days, CVS Health makes most of its money by managing and providing healthcare benefits. In 2018, CVS Health acquired Aetna, a major health insurance benefits manager. After adding more than 1 million new members in the first three months of 2023, Aetna collects monthly premiums from an estimated 37 million people.
In addition to around 1,100 walk-in medical clinics already located in select pharmacies, CVS Health recently acquired two large businesses that will dramatically increase its ability to provide the health benefits it also gets paid to manage. Signify Health operates a network of more than 10,000 clinicians across all 50 states, who provide millions of in-home health evaluations annually.
CVS Health also acquired Oak Street Health, a network of about 160 value-based primary care centers for Medicare patients. CVS Health expects Aetna's Medicare Advantage membership to swell by around 12% this year. In one fell swoop, the company will add the city of New York and over 200,000 of its retirees and their dependents to its membership roster this September.
Bargain pricing
An expanding roster of Medicare Advantage patients will give the company much more in monthly premiums to work with. At the same time, the operations of Signify and Oak Street should help lower overall medical expenses for the average patient.
During its first-quarter earnings call, CVS Health reiterated the medium-term outlook it provided in February. Management expects annual adjusted earnings to cross $10 per share in 2025.
Right now, you can buy shares of CVS Health for just 7.1 times 2025 adjusted earnings expectations. At this level, you could realize annualized returns at a double-digit percentage even if profits stagnate forever.
CVS Health's stock price might bounce around in the years ahead, but investors can reasonably expect reliably growing dividend payments. The company paused annual payout raises to help pay down debt from its acquisition of Aetna. Despite the pause, its payout has grown 169% over the past decade. Now, the stock offers a 3.4% yield.
CVS Health needed less than one-fifth of the free cash flow it generated over the past year to meet its dividend commitment. With more Medicaid Advantage members and new provider organizations to serve them, many more years of rapid dividend growth seem likely.
