On Sunday, CVS Health (CVS -0.65%) revealed that it would be shuttering its clinical trial services segment by the end of 2024, according to reporting from biopharma industry trade publication Endpoints News.
The pharmacy and health insurance giant began its foray into this space in 2021, and originally used its access to consumers to aid drugmakers in recruiting participants for COVID-19 vaccine trials and other coronavirus-related clinical investigations, but apparently, management doesn't feel that the business is contributing significantly to the company's prospects.
Now, investors have one less place to look toward in hopes of finding drivers for CVS' growth. Does this mean that CVS stock isn't as safe as shareholders have believed?
Financial pressures weren't coming to a head -- and still aren't
Right off the bat, let's make one thing clear: The closure of CVS' clinical trial operations doesn't imply financial weakness of any kind. In the first quarter of 2023, its total revenue rose by 11%, reaching $85.2 billion, derived from sales at its pharmacies, fees from its insurance plans, and its other health services.
When people fill their prescriptions through the company, they tend to remain customers for years, and most people in the U.S. are within 10 miles of one of its stores, so its sales are highly recurring. And while its net income fell by 9.3% to $2.1 billion in Q1 as a result of asset writedowns, it was still profitable, and generated $6.4 billion in free cash flow.
For those seeking dividend income, CVS' forward dividend yield is 3.5% right now, and it payout ratio of 74% looks quite sustainable. Furthermore, it has $17.7 billion in cash and equivalents, and there's no evidence to suggest that competitors like Walgreens Boots Alliance are gaining ground on its market share in any segment. In fact, CVS claims to hold a 26.8% share of the U.S. pharmacy services market compared to 25.5% four years ago.
Regardless of withdrawing from the clinical trials space, CVS management doesn't go out on a limb with its expansion plans, and it isn't competing in an industry that's easy to disrupt. After all, given that it owns its pharmacy real estate, much of it in highly desirable locations, any would-be competitor would struggle to contest its market share without spending vast sums of money on property. It's hard to imagine that people would defect from getting their prescriptions filled at their local pharmacy.
So this stock does seem pretty safe, but there's a bit more to the story.
Was this stock really ever that safe of an investment?
Aside from its base of highly recurring revenue, its tried-and-tested business model, and its steady sales and earnings growth, CVS' share price performance makes it worth thinking about what a "safe stock" really is.
The stock's total return was 44% over the last 10 years compared to the S&P 500's total return of 200%. This year so far, its shares are down by 25%, whereas the market is up by 8%. Does that sound safe to you? Moreover, it does not have a history of outperforming the market over any significant period. In other words, based on this stock's track record, if at any point you had simply bought an S&P 500 index fund, you'd almost always have done better with it than with CVS stock.
Nonetheless, it doesn't feel accurate to say that CVS is a risky stock either. Its business model is far too boring to fail without years of advance notice, its pharmacy services are too essential to daily life to be made obsolete, and its locations are far too ubiquitous to disappear overnight.
But because the company is carrying $76.5 billion in debt, it can't take on pricey new initiatives without the promise of larger returns than the costs of its interest payments. That leaves it quite constrained in its search for growth, and if there isn't significant synergy for a new initiative with its portfolio of pharmacies, it probably won't happen.
Given the pending shutdown of its clinical trial business, it's also reasonable to conclude that management's intuitions about where to find worthwhile synergies for growth are sometimes incorrect.
So if you're in the market for a safe payer of dividends, CVS still fits the bill as much as it ever did, and nothing has really changed that might threaten that situation. On the other hand, if you're looking for share price growth or a place to park your money where you can be sure of avoiding major losses, it isn't the right option. Either way, don't let the shuttering of its clinical trial services unit influence your decision-making by much -- that business never gained enough momentum to be a major contributor to CVS' earnings or expenditures anyway.
