It's been a tough year for healthcare giant CVS Health (CVS -0.22%). Investors are selling off the stock due to several issues, including a reduced full-year guidance in the first quarter and a health insurer deciding to decrease its reliance on CVS Health. As of this writing, the company's shares are down by 26% since the beginning of 2023, a huge drop for a corporation the size of CVS Health.
Still, there are plenty of reasons to consider investing in the stock, especially for long-term investors. Let's discuss three green flags investors should strongly consider.
1. Reputation matters
A company's brand name can be a powerful economic moat since consumers tend to gravitate toward those products and brands with which they are familiar. There are plenty of examples out there. Apple can sell its iPhones and other gadgets at outrageously expensive prices despite the availability of cheaper options, largely because its customers are loyal. Coca-Cola branded drinks immediately attract people's attention and, in many cases, lead to sales.
Similarly, CVS Health has developed a solid reputation and brand name in the healthcare sector. It is one of the largest pharmacy chains in the U.S., where thousands of patients have been going to fill their prescriptions for years. And while they are at it, many also treat it as a small convenience store. The relationships CVS Health has developed with patients and physicians aren't something that can be replicated overnight.
This aspect of CVS Health's business should allow it to remain a leader in the industry for many years.
2. Diversified operations
CVS Health isn't just a pharmacy chain, however. The company has substantially diversified its business through a series of acquisitions. CVS Health wants to hold patients' hands through much of their healthcare journey, from primary care and health insurance to providing over-the-counter and prescription medicines.
The company's recent acquisition of Oak Street Health -- a primary care provider especially focused on older adults -- is just one example of the company's long-term strategy. CVS also bought out Signify Health, a company that delivers care to patients in the comfort of their homes, among many other services.
Of course, CVS also owns insurance giant Aetna. And recently, the company decided to launch a biosimilar business called Cordavis. The first order of business for the company will be to partner with Sandoz -- a Switzerland-based specialist in this industry -- and market a biosimilar version of the blockbuster immunology drug Humira, whose patent protection in the U.S. expired earlier this year.
Considering how crowded this niche already is, it's difficult to know how successful CVS Health's version of Humira will be. But as the company argues, the U.S. biosimilar market will rise to more than $100 billion by 2029, up from less than $10 billion in 2022.
If that seems too optimistic, consider that some medicines with extremely high sales will experience patent cliffs before then. Chief among them will be Merck's Keytruda, a cancer medicine that should take over as the best-selling therapy in the world this year and hold on to that title until 2028 when it will face its patent cliff; Keytruda's sales could peak at $30 billion, according to some estimates
The biosimilar market is just one more opportunity for CVS Health to exploit, and just as important, the company's healthcare ecosystem is strengthening.
3. Too cheap to ignore
CVS Health's recent sell-off has made its stock surprisingly affordable. The company trades at a forward price-to-earnings (P/E) ratio of just 8. For comparison, the average forward P/E for the healthcare industry tops 16.8 -- more than twice that of CVS Health. The healthcare giant won't recover overnight, but at current levels, the company looks like a table-pounding buy for investors focused on the long game.
And here is one bonus reason to consider the stock: The dividend. In the past 10 years, CVS Health has increased its payouts by almost 169%. It offers a competitive yield of 3.49% -- compared to the S&P 500 index's average of 1.54%, and a cash payout ratio of just 17.1%. CVS Health is a dream come true for both value and income-seeking investors.
