At any given time, the market may not be appropriately valuing a stock based on the fundamentals of its underlying business. This is because market participants aren't always completely rational. Value investors can use this knowledge to their advantage by picking up businesses while they are deeply undervalued.
Shares of diversified healthcare giant CVS Health (CVS -0.22%) look to be a savvy buy right now. Here are three reasons why.
1. A big fish in an even bigger pond
Reaching over 110 million members as a pharmacy benefit manager via Caremark and another 24.4 million medical benefit members through Aetna, CVS Health is a titan of the healthcare sector. In fact, the company's $88 billion market capitalization positions it as the third-largest healthcare plan business, behind only UnitedHealth Group and Elevance Health.
Since the company acquired Aetna in 2018, it has taken a top-down, vertically integrated approach to running its business. Building on its importance to healthcare, CVS Health completed an $8 billion deal for the technology and analytics company Signify Health in March. The company also finalized a $10.6 billion acquisition of the primary care centers company Oak Street Health in May.
The thought is that the addition of these businesses can help the company to improve the patient experience in every interaction that they have within the healthcare system. That could unlock significant value throughout the business, which could result in a higher market share for CVS Health.
And if you didn't think that was enough, this improved competitive positioning would be on top of promising trends playing out within healthcare. As the world grows in both population and healthcare spending per person, global healthcare spending is on track to reach a mindboggling $18.3 trillion by 2040.
Even for a company like CVS Health that analysts expect to haul in $347.7 billion in revenue in 2023, this demonstrates the substantial growth potential within the healthcare sector. For these reasons, analysts think the company should have no problem in generating mid-single-digit annual earnings growth over the next five years.
Image source: Getty Images.
2. A safe and attractive payout
If investors are looking for high starting income, the 3.5% dividend yield of CVS Health may be one of the best places to find it. Put into perspective, that is more than twice the S&P 500 index's 1.6% yield.
Better yet, CVS Health looks to be capable of delivering many more payout increases like the most recent 10% hike announced last December. That is because it is projected that the company's dividend payout ratio will register at roughly 28% in 2023. This payout ratio strikes the necessary balance between leaving CVS Health the funds needed to execute more acquisitions and to repay debt, as well as reward shareholders with dividend boosts and a share repurchase program.
3. The stock is dirt cheap
In this high-interest-rate environment, investors have been spooked by CVS Health's recent acquisition activity. This may explain why shares of the stock have plunged 25% so far in 2023, pushing the forward price-to-earnings (P/E) ratio down to a modest 7.8. For context, that's well below the healthcare plans industry average forward P/E ratio of 13.
But as the company whittles down its debt and works to gracefully incorporate its recent acquisitions into the overall business, those fears could be put to rest within the next few years. This could lead to considerable upside for investors with the conviction and patience to buy at the current $70 share price.
