Dividend Safety Scores range from 0 to 100, and conservative dividend investors should stick with firms that score at least 60. Since tracking the data, companies cutting their dividends had an average Dividend Safety Score below 20 at the time of their dividend reduction announcements.
We wrote a detailed analysis reviewing how Dividend Safety Scores are calculated, what their track record has been, and how to use them for your portfolio here.
CVS Health Corp (NYSE:CVS) has a Dividend Safety Score of 99, indicating that it is among the safest dividends of any stock in the market today. This rock solid safety rating begins with its healthy payout ratios, which on a full year 2016 EPS and free cash flow, or FCF per share, basis are expected to ring in at 34.3%, and 26.5%, respectively.
In other words, CVS Health is generating far more earnings and cash flow than it needs to keep the current dividend safe, even in the event of another great recession like economic downturn. With that said, the business has proven to be recession-resistant. Sales dipped just 2% in fiscal year 2010.
Source: Simply Safe Dividends
Better yet, thanks to the low payout ratios, CVS is retaining sufficient cash to continue buying back shares at an aggressive rate (3.7% CAGR over the last five years).
Specifically, management expanded the company’s share repurchase authorization by $15 billion this morning, bringing it up to $18.7 billion. This could reduce the share count by more than 5% annually at today’s share price.
This helps both long-term dividend security and growth because a smaller share count over time means that EPS and FCF per share will grow faster and allow stronger, longer, and more sustainable payout growth.
In fact, when it comes to maintaining a conservative payout ratio, CVS management has proven itself a master of balancing the growth of the dividend against maintaining fortress-like payout security, even during times of immense economic distress such as 2008-2009.
As seen below, CVS’s EPS payout ratio has roughly tripled over the last decade but remained low and stable every year.
Source: Simply Safe Dividends
Of course, a vital component of this conservative, safe dividend strategy includes maintaining a strong balance sheet, which allows CVS great financial flexibility no matter what interest rate or economic conditions may be present.
The key things to focus on with CVS’s credit metrics, are its high interest coverage ratio, which at 8.7 shows the company easily able to service its debt obligations. The company’s total book debt could also be covered using cash on hand and 2.9 years’ worth of earnings before interest and taxes (EBIT), which is reasonable. S&P assigns the company a BBB+ credit rating (for comparison’s sake, Walgreen’s credit rating is BBB).
Source: Simply Safe Dividends
While some of CVS’s debt metrics may seem high, remember that the pharmacy business is relatively capital intensive, meaning that higher debt loads are to be expected. This is acceptable to me because the underlying business is stable and generates loads of reliable free cash flow, which can be used to service debt and pay dividends.
Source: Simply Safe Dividends
Overall, CVS’s dividend payment is about as safe as they come. The company maintains low payout ratios, generates consistent free cash flow, provides nondiscretionary products and services, and keeps a reasonable balance sheet.
