Fourteen consecutive years of dividend increases have made CVS Health Corporation (NYSE: CVS) a Dividend Achiever, a stock with at least ten years of annual dividend increases. Not only does CVS Health raise its dividend every year, it also increases its payouts by generous amounts. In 2016, CVS increased its annual dividend amount to $1.70, a 21% increase over 2015's payout. This year, CVS is on track to increase its annual dividend to $2.00 per share, an 18% increase. These substantial increases in dividend payments have made shares in CVS Health popular with dividend growth investors.
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Yet CVS's stock price has been hammered over the past year, causing some investors to wonder if the drug store chain's dividend is safe. Conversely, the drop in share price combined with the large increases in dividend payments have caused the stock's dividend yield to spike, making the stock more attractive to dividend investors. Let's take a look at what has caused the company's struggles, what management is doing to rectify the situation, and whether CVS's dividend is truly safe.
What's ailing this drug store?
As expected, CVS got off to a rough start this year when it announced its first quarter earnings. Net revenues inched up to $44.5 billion, a 3% increase year over year, but net income fell 17% to $953 million. The fall in income was driven by a 4.7% decline in same-store sales in the retail segment. The pharmacy benefits manager (PBM) segment did increase revenue by 8.5% to $31.2 billion, but this business segment saw margins pressured by generic drug sales and pricing pressures.
CVS's woes began when it lost two major deals to arch-rival Walgreens Boot Alliance. In August 2016, Prime Therapeutics, one of the nation's largest PBMs, announced a partnership with Walgreens. In December, Tricare, the Department of Defense's nine million members plus benefits program, replaced CVS with Walgreens. The loss of these two deals made CVS management guide for essentially flat revenue and earnings growth in 2017.
To make matters worse, earlier this month it was reported that Amazon.comwas exploring the possibility of entering the pharmacy market. These days, there is no news more troubling to a brick-and-mortar retailer than the possibility of direct competition from Amazon.
Image source: CVS Health Corp.
Does management have the right prescription?
By leveraging technology more effectively, the company believes its unique collection of assets can deliver convenient healthcare solutions better than competitors. These assets include a nationwide network of pharmacy and retail locations, 800 MinuteClinic locations, and a revamped app. CVS Curbside lets customers order and pay for items via their phones and pick them up at the location of their choice, all without getting out of their cars. CVS also plans to soon introduce same-day delivery of prescriptions and retail merchandise.
Management believes if it delivers on the execution of these measures it will return to double-digit percentage revenue and earnings growth as soon as 2018.
So, about that dividend...
Despite all the troubles, investors seeking income need not worry. CVS is guiding for flat, not negative, earnings and revenue growth. The dividend is currently well-covered by earnings; a situation unlikely to change anytime soon. The company's dividend payout per share is currently $2.00 and, given that the trailing twelve month adjusted EPS for the company is $5.84, the current payout ratio is only 34%. For reference, anything under 60% is generally considered safe.Furthermore, the same EPS is essentially the midpoint of guidance that management gave for 2017. Therefore, based on everything we can possibly know, CVS's dividend still has plenty of room to grow before the company would even need to consider a cut or suspension of its payout.
CVS is a great company currently facing headwinds from several different directions. But, even navigating in these difficult conditions, the company still generates a substantial amount of cash flow and will probably not see a significant decrease in earnings per share. If the company can return to double-digit percentage growth in 2018 and beyond, as it projects, then dividend investors should be able to expect continued ample dividend hikes in the years ahead.
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