The U.S. is the world's most lucrative healthcare market, with the country spending more than $12,000 per capita. That's roughly $5,000 more than Germany, the runner-up country.
Pharmacy giant CVS Health (CVS -0.22%) has invested plenty of money and effort to help it evolve from its pharmacy roots into a diversified healthcare conglomerate. It hasn't been a smooth ride; share prices are down nearly 40% from their highs in 2015.
But the good times could be on the way. Here are three reasons you should consider buying CVS stock as a long-term investment and one potential flaw that could make it all crumble.
1. CVS Health is an integrated healthcare pillar
CVS spent decades operating a pharmacy business and accumulated a vast portfolio of stores with prime real estate locations throughout the U.S. It's a defensive business model since patients generally need their scripts filled, and patients have been going to their local pharmacies for years -- it's a well-entrenched habit.
But CVS has moved to become a multi-tooled pillar in the healthcare system. It acquired health insurance company Aetna in 2018 and recently acquired primary care business Oak Tree Health and analytics company Signify Health.
This has created a three-pronged CVS business (insurance, care services, pharmacy) that can monetize patients throughout their care journey, not just when a script is issued. The company is still integrating all these segments, which will take time. Still, analysts believe CVS can grow earnings per share by an average of more than 6% annually over the coming years.
2. CVS Health's dividend is safe
CVS spent billions on this transformation and temporarily froze its dividend to conserve cash from 2016 to 2021. The dividend just recently began growing again and looks in good shape moving forward. Investors can get a 3.5% dividend yield at the current share price, and the dividend payout ratio is only 17% of cash flow.
CVS Dividend data by YCharts
The stock has a solid shot at double-digit investment returns, needing only to grow earnings at its expected pace (nearly 6.5% annually) and make its dividend payments. That's a nice potential floor considering the upside in the stock's valuation.
3. CVS shares trade at a compelling valuation
Analysts believe CVS will earn approximately $8.61 per share in 2023, valuing the stock at a price-to-earnings ratio (P/E) of 8 and a PEG ratio of 1.2. That looks like an appealing valuation given CVS' expected growth, but the long-term investor (looking at least five years ahead) could do even better.
CVS is paying over $2 billion in annual interest on its $58 billion in debt, which is sapping the company's profits. Interest accounted for more than half of CVS' net income over the trailing four quarters. Since the dividend payout ratio is so small, CVS should be able to continue paying down debt and reduce its interest obligations over the coming years. That could juice earnings growth as more of that money trickles from interest to the bottom line.
CVS Total Long Term Debt (Quarterly) data by YCharts
The debt load arguably paints a picture where a less bloated balance sheet makes CVS more financially attractive to investors than it's currently getting credit for. Investors should consider this possible tailwind when doing their homework on the stock.
Sell CVS Health to avoid long-term regulatory threats
Aetna is estimated to be the third-largest health insurance company in the U.S. That makes it a big part of CVS and ties the company to potential regulatory threats in the future. Politicians have targeted the U.S. healthcare system multiple times for its poor affordability and lack of access to all patients.
In a scenario where the country abolishes private health insurance in favor of a federal program, the impact could be catastrophic for CVS. It's tough to say whether this happens or not, but it's something investors should never completely dismiss.
Given the multiple positives around CVS, it's hard not to like the stock as a long-term healthcare investment, despite the risk of potential regulatory problems.
