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CVS: Efficiency could Bolster Dividend Payouts

Stock MarketsSep 19, 2021 10:31AM ET
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© Reuters. CVS: Efficiency could Bolster Dividend Payouts

CVS Health Corporation (NYSE:CVS) is a U.S.-based pharmacy chain with offerings throughout the entire health care spectrum. CVS stock is heavily backed by Michael Burry and has gained by more than 25% year to date. I am bullish on the stock.

Sales Growth

CVS recorded a sublime second quarter, with year-over-year revenue growth of 11.1%. The group benefited from continued Government service business and a 13.80% year-over-year increase in Medical Memberships.

According to the group's CEO, Karen Lynch, "This quarter was highlighted by broad sales and earnings outperformance, as well as sequential operating margin improvement."

Operating Efficiency

I directed the headline numbers and found CVS' operating efficiency to be the catalyst for its strong numbers. Since June 2020, the company's days of sales outstanding have decreased by 1.63, while its operating margin has increased by 1.96%. These factors have contributed to an improved year-to-date interest coverage ratio (+21%), subsequently opening up larger after-interest margins for equity holders to benefit from.

Finally, CVS' net income margin (2.60%) and cash from operations ($14.18 billion) are at a five-year high, which may lead to a dividend payout increase.

Dividend Capacity

I believe CVS has plenty of dividend capacity, especially since it has suspended its share repurchase program and decided to compensate investors with dividends only. With dividends already yielding 2.34%, CVS stock has a free cash flow yield to dividend yield ratio (4.42%) that exceeds its 5-year median by 10.44%. It also has a payout ratio that is still 15.20% lower than its 5-year average.

If we consider these ratios out of isolation and look at CVS's profitability, it would be impossible to think its dividend capacity isn't increasing.

Wall Street's Take

Average CVS price target is $100.50, with a 17.5% upside.

Wall Street thinks the stock is a Strong Buy, with 9 Buy and 1 Hold ratings, and that it will reach the $100 handle within the next 12-months. 5-star analyst Ricky Goldwasser of Morgan Stanley (NYSE:MS) placed the latest and highest price target of $114 on the stock, citing underappreciated cost-cutting and capital deployment as her main reasons.

Concluding Thoughts

CVS looks good all around. Its high-quality and sustainable topline revenue is being accommodated with operational efficiency, which could lead to both capital gains and strong dividend income for investors.

Disclosure: At the time of publication, Steve Gray Booyens had a long position in CVS.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of Tipranks or its affiliates, and should be considered for informational purposes only. Tipranks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. Tipranks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by Tipranks or its affiliates. Past performance is not indicative of future results, prices or performance.

CVS: Efficiency could Bolster Dividend Payouts
 

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