If you're looking for reliable stocks, it's hard to go wrong with the healthcare sector. People can avoid paying for travel and luxury goods when the economy is in a slump. Overall healthcare spending, though, keeps on rising along with the size of the population.
At recent prices, shares of healthcare conglomerate CVS Health (CVS -0.22%) offer a 3.5% dividend yield. Here are three reasons to add it to a portfolio now and hold it for the long run.
1. CVS Health is bigger than you think
You're more than likely familiar with CVS Health's chain of over 9,000 retail pharmacies. What you probably don't realize is that pharmacies are a relatively small part of the company's overall business.
CVS Health reported $17.5 billion in total adjusted operating income last year. Its Pharmacy and Consumer Wellness segment, which contains retail pharmacies, delivered just $6 billion.
CVS Health also owns Aetna, an insurer that collects monthly healthcare plan premiums from 25.7 million people. A rush of seniors accessing care they had avoided during the pandemic raised expenses and shrank Health Care Benefits segment operating income by 12% last year. At $5.6 billion, though, this segment is nearly even with Pharmacy and Consumer Wellness.
Image source: Getty Images.
CVS Health increasingly provides many of the services Aetna is paid to manage. For example, it recently acquired Signify Health, a network of more than 10,000 clinicians that provide home-based visits.
When you fill a prescription at a CVS pharmacy or nearly any other pharmacy in the U.S. there's a good chance that CVS Health's pharmacy benefits management (PBM) business has a hand in the transaction. CVS Health's health services segment houses its PBM business and was its most lucrative segment last year, with around $7.3 billion in operating income.
2. An aging demographic
As a healthcare conglomerate that owns a health insurance business, a leading pharmacy benefits manager, physician networks, and thousands of pharmacies, an investment in CVS Health is a bet that overall healthcare expenses will continue rising. Thanks to aging demographics, this is a relatively safe bet.
It isn't just your imagination: The number of new seniors eligible for Medicare coverage is soaring. During the 100 years that ended in 2020, the group of folks over the age of 65 grew five times faster than the overall population, and the pace is accelerating. During the decade between 2010 and 2020, the over-65 population grew by a whopping 38.6% to 55.8 million.
The youngest baby boomers turn 65 in 2029, but the pace of new seniors will only decrease slightly. In other words, healthcare stock investors can count on 10,000 or more people becoming eligible for Medicare every day for the foreseeable future.
3. Rapid dividend growth
These days, cautious investors looking for a safe way to build up a stream of passive income ignore CVS Health because its streak of consecutive annual dividend raises is only three years long.
CVS Dividend data by YCharts
CVS Health froze its quarterly dividend payout in place for a few years to help pay for its $70 billion Aetna acquisition. Despite the temporary freeze, the payout has grown an outstanding 142% over the past decade.
Increased utilization of healthcare services from seniors and recent acquisitions of care provider networks like Signify Health are pressuring profits. The $10.4 billion in free cash flow CVS Health reported last year is down sharply from the company's peak in 2022, but it's still more than enough to allow for more big dividend payout bumps in the years ahead.
Know the risks
CVS Health isn't the only healthcare conglomerate that knows how to successfully combine related healthcare businesses. UnitedHealth Group's Optum Health segment employs or is affiliated with more than 10% of all American physicians.
Government regulators have noticed how successfully large health insurers have been integrating physician service businesses. In February, the Wall Street Journal reported that the Justice Department began a UnitedHealth Group antitrust investigation.
Investors also want to keep an eye on Mark Cuban's direct-to-consumer pharmacy, Cost Plus Drugs, and Amazon. Last summer, CVS Health's PBM lost a significant amount of business to these new competitors in California. CVS Health is launching new programs that could help retain clients, but they'll most likely reduce profits from the PBM business.
CVS Health is a great dividend growth stock to buy and hold for the long run. With these risks in mind, though, it's best to make it a relatively small part of a well-diversified portfolio.
