Company Description: CVS Health Corporation is the largest pharmacy health care provider in the U.S.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
CVS is trading at a discount to 1.), 2.) and 3.) above. Since CVS's tangible book value is not meaningful, a Graham number can not be calculated. When also considering the NPV MMA Differential, the stock is trading at a 46.3% discount to its calculated fair value of $143.38. CVS earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
CVS earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. CVS earned a Star for having an acceptable score in at least two of the four Key Metrics measured.
Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2007-2010, 2008-2011, 2009-2012, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1916 and has increased its dividend payments for 14 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
CVS earned a Star in this section for its NPV MMA Diff. of $14,014. This amount is in excess of the $2,100 target I look for in a stock that has increased dividends as long as CVS has. If CVS grows its dividend at 17.6% per year, it will take 1 years to equal a MMA yielding an estimated 20-year average rate of 2.65%. CVS earned a check for the Key Metric 'Years to >MMA' since its 1 years is less than the 5 year target.
Peers: The company's peer group includes: Express Scripts Holding Company (ESRX) with a 0.0% yield, Rite Aid Corporation (RAD) with a 0.0% yield, and Walgreen Co. (WBA) with a 2.0% yield.
Conclusion: CVS earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks CVS as a 5-Star Very Strong stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $162.06 before CVS's NPV MMA Differential decreased to the $2,100 minimum that I look for in a stock with 14 years of consecutive dividend increases. At that price the stock would yield 1.2%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,100 NPV MMA Differential, the calculated rate is 11.1%. This dividend growth rate is below the 17.6% used in this analysis, thus providing a margin of safety. CVS has a risk rating of 2.00 which classifies it as a Medium risk stock.
With a free cash flow payout of 23% (down from 24%) and a debt to total capital of 45% (down from 50%), the company's dividend metrics are very strong and it should have no problem raising its dividends in the coming years. The stock is trading below my $143.38 calculated fair value and has demonstrated an exceptional ability to grow its dividend at a high rate, averaging over 27% per year since 2007. I recently initiated a position in my High Dividend Growth Stocks Portfolio.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in CVS (7.5% of my High Dividend Growth Stocks Portfolio). See a list of all my Dividend Growth Portfolio holdings here.
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Tags: CVS, ESRX, RAD, WBA,
