Shares of CVS Health (CVS -0.22%) have tumbled about 27% in 2023. At its beaten-down price, the stock offers an above-average dividend yield, and it has a track record of raising its payout rapidly.
Is now a good time to buy the healthcare conglomerate? Let's weigh the company's strengths against the challenges it faces to see if it's a good stock to buy now.
Why investors are nervous about CVS Health stock
CVS Health's pharmacy benefits management (PBM) business is the company's largest operation, but it could be unraveling.
Health plan sponsors hire PBMs to wrangle rebates and discounts from drugmakers that sell competing treatments. With about 110 million members, CVS Health's PBM is America's largest.
In theory, this means the company has more power to lower prescription drug spending than any of its peers. Unfortunately for CVS Health shareholders, at least some of the PBM's clients don't think it's passing along enough of the rebates it receives.
This summer, after 15 years with CVS Health, Blue Shield of California decided to hire Amazon's new pharmacy business and Mark Cuban's Cost Plus Drugs to reduce prescription drug spending for its members. If Blue Shield of California realizes the $500 million in savings it projected, we could see more defections.
CVS Health's health services segment, the one that houses its PBM business, was responsible for nearly half of the company's total operating income during the first nine months of the year. A rapid decline in PBM business could make raising its dividend payout extremely challenging.
Reasons to buy CVS Health stock now
Think back to the last big healthcare expenses you paid. Odds are pretty good that they weren't optional. In good economic times and bad ones, cash flows from healthcare businesses tend to be more reliable than most sectors of the economy.
CVS Health's PBM could be on the decline, but Aetna, its healthcare benefits management business, could shift into a higher gear soon. This spring, the company acquired Oak Street Health, a value-based care primary care provider with 169 medical centers spread throughout 21 states. It also acquired Signify Health, a provider of in-home health assessments that has a network of more than 10,000 clinicians.
Aetna collects monthly premiums from more than 35 million people. Unlike any other health insurance benefits managers, CVS Health runs more than 1,000 walk-in clinics spread throughout its chain of roughly 9,000 retail pharmacies. This means it can provide many of the health benefits it's also paid to manage. With two new value-based care organizations, there's a good chance CVS Health can reduce medical expenses and boost profits even further.
In August, CVS Health launched a subsidiary that will work with drugmakers to commercialize lower-cost biosimilar versions of top-selling treatments. This will be the first time a big retail pharmacy chain that also owns a big health insurance business has tried to commercialize expensive biologic drugs. It's too early to predict success, but if this initiative does deliver cost savings, it's unlikely to be repeated by any competitors.
Image source: Getty Images.
Shares of the healthcare conglomerate offer a 3.5% dividend yield at recent prices, and investors will be glad to know the payout is rising fast. CVS Health paused dividend raises for a few years to pay down some debt it took on to acquire Aetna in 2018, but it's come roaring back. The company raised its payout by 10% at the beginning of 2022 and another 10% at the beginning of 2023.
CVS Health has the cash flows to bump up its payout by a double-digit percentage again in 2024. The company expects adjusted earnings to land between $8.50 and $8.70 per share this year, but its payout is currently set at an annualized $2.42 per share.
A buy now
CVS Health raised third-quarter revenue by more than 10% year over year, but its shares are trading at a valuation that suggests a lack of growth ahead. At recent prices, you can buy the stock for just 8 times the midpoint of management's earnings expectation for 2023.
With a unique collection of assets, CVS Health's PBM business and Aetna can lower outgoing expenses in ways its competitors can only dream of. This means buying some shares on the dip to hold for the long run looks like the right move at the moment.
