CVS Caremark Corporation (CVS) Earnings Preview: A Great Company For The Next Ten Years And Beyond

Even more impressive than the dividend is the excellent record of buybacks.  Since 2008, the company has reduced the amount of outstanding shares from 1.47 billion to 1.25 billion, a 15% reduction in 5 years.  I would expect this trend of around a 3% reduction per year to continue for years to come.

Along with Walgreen Company (NYSE:WAG), CVS dominates the retail drug store segment.  The third largest chain, Rite Aid Corporation (NYSE:RAD), is many times smaller than either company, making it barely a threat to either one. In addition, Rite-Aid is even forecast to go out of business or be taken over with its awful earnings numbers.  They lost 64 cents per share in 2010 and 43 cents per share in 2011 (bear in mind the share price is just $1.56!).  While the company is forecast to break even this year (zero earnings), I don’t really see how Rite-Aid even makes sense as an investment, except as a speculative play.

CVS currently trades for 15.2 times 2012 earnings, which I feel is more than reasonable considering their shareholder-friendly track record and ambitious growth plans.  According to consensus estimates, 2012’s earnings of $3.40 per share will grow to $3.93 and $4.39 in 2013 and 2014, respectively, or by 15.6% and 11.7%, which I feel more than justifies the valuation.

Walgreen, on the other hand, trades at 18 times earnings, with a slightly lower annual earnings growth rate going forward, and the consensus calling for 10.8% growth.  I should point out that Walgreen looks much better as a pure income investment.  They have a similar track record to CVS when it comes to raising the dividend; however, the yield is a full percentage point higher, which is very significant to income investors.

Provided there are not any unforeseen surprises during next week’s earnings call, I would expect CVS to continue on its path of dominance in its sector.  I would like to see a dividend increase this year, to somewhere in the neighborhood of $0.65 per share, as well as a continued buyback program.  My favorite long-term investments are those that provide growth as well as income, and CVS does a pretty good job of both.

Just a thought, because I hear the critics getting ready: while a yield of just under 2% doesn’t exactly qualify it as an income stock,  if the ambitious growth and buyback causes shares to increase fivefold again over the next decade, 2% of the share price will be a pretty significant amount of money!

The article CVS Caremark Earnings Preview: A Great Company For The Next Ten Years And Beyond originally appeared on Fool.com and is written by Matthew Frankel.

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