Shares of CVS Health (CVS 0.88%) are down about 27% in 2023. At its lower price, the stock offers an above-average dividend yield and has a track record of growing its payout quickly.
Is it 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 benefit management (PBM) business is the company’s largest operation, but it could be spun off.
Health plan sponsors hire PBMs to wrangle discounts and rebates from drugmakers who sell competing treatments. With about 110 million members, CVS Health’s PBM is America’s largest.
In theory, that means the company has more power to lower prescription drug costs than any other company. Unfortunately for CVS Health shareholders, at least some of the PBM’s customers don’t think it’s passing on enough of the rebates it receives.
This summer, after 15 years with CVS Health, Blue Shield of California decided to hire Amazonthe new pharmacy business and Mark Cuban’s Cost Plus Drugs to lower prescription drug costs for its members. If Blue Shield of California realizes the projected $500 million in savings, 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 in the first nine months of the year. The rapid decline in the PBM business could make increasing the dividend payout extremely challenging.
Reasons to buy CVS Health stock now
Think about the last major health care expense you paid. The odds are pretty good that they weren’t mandatory. In good economic times and bad, the cash flows from healthcare businesses tend to be more reliable than most sectors of the economy.
CVS Health’s PBM may be in decline, but Aetna, its health benefits management business, may soon be kicking into high gear. This spring, the company acquired Oak Street Health, a value-based primary care provider with 169 medical centers located in 21 states. It also acquired Signify Health, a home health assessment provider that has a network of more than 10,000 clinicians.
Aetna collects monthly premiums from more than 35 million people. Unlike all other health insurance benefits managers, CVS Health operates more than 1,000 clinics spread across a chain of approximately 9,000 retail pharmacies. This means it can provide many of the health benefits it is also paid for. With two new value-based care organizations, there’s a good chance CVS Health can lower medical costs and increase profits even more.
In August, CVS Health launched a subsidiary that will work with drugmakers to commercialize cheaper biosimilar versions of top-selling treatments. It would be the first time a major pharmacy chain, which also owns a large health insurance business, has attempted to commercialize expensive biologic drugs. It is too early to predict success, but if this initiative results in cost savings, it is unlikely to be replicated by competitors.
Shares of the healthcare conglomerate offer a 3.5% dividend yield at recent prices, and investors will be happy to know the payout is growing quickly. CVS Health halted dividend increases for several years to pay down some of the debt it took on to acquire Aetna in 2018, but is back with a roar. The company raised its payout by 10% in early 2022 and another 10% in early 2023.
CVS Health has the cash flow to increase its payout by a double-digit percentage again in 2024. The company expects adjusted earnings to reach between $8.50 and $8.70 per share this year, but the payout is currently set at an annualized 2.42 dollars per share.
CVS Health boosted third-quarter revenue by more than 10% year-over-year, but its stock is trading at a valuation that suggests a lack of growth going forward. At recent prices, you can buy shares for just 8 times the midpoint of management’s 2023 earnings expectations.
With a unique collection of assets, CVS Health and Aetna’s PBM businesses can reduce outbound costs in ways their competitors can only dream of. This means that buying some stocks on the dip to hold them for the long term seems like the right move right now.
John Mackie, former CEO of Whole Foods Market, a subsidiary of Amazon, is a member of The Motley Fool’s board of directors. Corey Renauer has positions at Amazon and CVS Health. The Motley Fool has positions in and recommends Amazon. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.