CVS Health Corp (CVS) Dividend Stock Analysis

Long term demand for healthcare is only going to increase, as the population increases, and a larger portion of the population is aging.

A potential risk for healthcare companies includes the risk of repeal for the Affordable Care Act. This would result in the loss of insurance for approximately 20 million people, which could reduce demand for healthcare.

A second risk includes consolidation with its suppliers, which could reduce CVS’s pricing power. A third risk includes increased risk of greater transparency.

A third risk for CVS Health Corp (NYSE:CVS) is increased competition from other Pharma Benefit Managers.

The annual dividend payment has increased by 25% per year over the past decade, which is lower than the growth in EPS. This was achieved due to the expansion in the dividend payout ratio. Dividend growth over the next decade could likely exceed growth in earnings per share.

A 25% growth in distributions translates into the dividend payment doubling almost every three years on average. If we check the dividend history going as far back as 1996, we could see that CVS has actually managed to double dividends almost every five years on average.

In the past decade, the dividend payout ratio increased from 10% in 2006 to 30% in 2015. The latest dividend hike to 42.50/share puts the forward dividend payout ratio at 29% expected 2016 earnings per share. Therefore, I believe the payout is sustainable. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

The return on equity has remained between a high of 15.20% in 2006 to a low of 9.20% in 2011. Currently, it is a t 13.80%. I generally like seeing a high return on equity, which is also relatively stable over time.

Currently, CVS Health Corp (NYSE:CVS) is attractively valued at 12.80 times forward earnings and a yield of 2.20%. I took advantage of the huge sell-off last week and initiated a small new position in the stock. I would be even more interested in the stock if it manages to provide better entry yields above 2.50%, equivalent to a price of $68/share.

Full Disclosure: Long CVS and WBA

Additional Links:

(1) http://www.dividendgrowthinvestor.com/2015/12/dividend-growth-investing-at-work.html

(2) http://www.dividendgrowthinvestor.com/2010/05/why-dividend-growth-stocks-rock.html

(3) http://www.dividendgrowthinvestor.com/2016/05/target-attractively-valued-dividend.html