Home Discount rate CVS Health: Stock buybacks and a dividend catalyst (NYSE: CVS)

CVS Health: Stock buybacks and a dividend catalyst (NYSE: CVS)


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SVC Health (NYSE:New York Stock Exchange: CVS) published a better balance sheet in their Q1 2022 report compared to my first review of them where I discussed their FY2021 report. A few weeks later he published a 7% gain better than the broader bear market, before it was rejected and it is currently trading above its important support zone at around $96. CVS is always a buy and a potential drop makes this stock more attractive, with a rising dividend yield and an expanded margin of safety.

Company Update

CVS remains committed to its mission to change the future of American healthcare with the goal of providing more cost-effective care and improving the consumer experience through their technology and digital enhancement. In fact, despite current headwinds like the rising cost of everything and a potential recession this year, management reassured its investors during the first quarter 2022 earnings call that they were still looking to spend to improve their digital operation with their capital expenditure of $2.8 billion to $3.0 billion. budget this financial year 2022.

They are producing a higher margin, which I will discuss in more detail later, thanks to their strong cost reduction initiative, which is focused on digitization and some divestments. According to management, they are divesting healthcare facilities from their Thailand operations, which are currently contributing negatively to CVS’s net income of $41 million.

CVS is currently diversifying its portfolio into home healthcare, which experts predict is expected to grow globally at an impressive CAGR of 10%, and on top of that, another value-added catalyst is how the company finances its expansion; they tend to sell their non-performing business instead of financing it with debt.

Here are some advantages highlighted by management for the proposed plan:

…Partnering in technology and home care will allow us to reduce readmissions and improve care for our clients at this critical stage of their recovery. As we expand our capabilities to create new sources of value, we continually assess our portfolio for non-strategic assets. Source: Q1 2022 Earnings Call Transcript

Despite headwinds from the looming Covid-19 catalyst, CVS managed to deliver 11.42% year-over-year growth in operating revenue ($76,658 million, vs. $68,800 million in the first quarter of 2021).

Good operating segment performance, but

CVS: Segment Performance Growth

CVS: Segment Performance Growth (Source: First Quarter 2022 Company Filings)

As you can see from the image above, all of its operating segments generated overall growth. Regarding its healthcare benefits segment, despite its strong annual revenue growth of 12.8%, it produced a slower adjusted operating profit this first quarter of 2022 amounting to 1,751 million, compared to $1,782 million recorded in the same quarter last year.

CVS: increase in the total number of members

CVS: increase in the total number of members (Source: First Quarter 2022 Company Filings)

I thought there was an inefficiency because their medical benefit ratio (MBR) had gone up to 83.5% this quarter from 83.2% in the same quarter last year. However, further investigation reveals that its corresponding GAAP figure on this segment produced a higher figure this quarter, amounting to $1,409 million, compared to $1,380 million recorded in the first quarter of 2021. In fact, CVS has seen a marked increase in its total number of members, which has boosted its turnover. upper. In addition to this, management provided a positive outlook for its healthcare benefits segment, where its total revenue is expected to increase by approximately $89.3 billion to $90.8 billion, from $82,186 million recorded last fiscal year. Additionally, management expects to maintain its MBR level at approximately 83.5% to 84.5% in fiscal 2022, higher than its 80.9% in the prior fiscal year and 84.2% recorded. in fiscal 2019, and management expects this segment to provide additional growth of $180 million to generate an adjusted operating profit estimate of $5.94 billion to $6.04 billion. dollars. This is an increase from $5.012 billion recorded in the previous fiscal year.

Additionally, management provided a neutral perspective on the impact of the second Covid-19 recall on the business, contrary to what I had previously expected, that it could help further increase its revenue. .

Our updated guidelines now reflect the assumption that a fourth COVID-19 booster will be given to adults ages 50 and older and certain immunocompromised individuals according to guidelines established by the CDC. The administration of a fourth recall is expected to be net neutral to our business. This represents an additional cost to our healthcare benefits segment, but helps maintain our full-year outlook for our retail segment by offsetting the previously mentioned Q1 2022 spending pressures. Source: Q1 2022 Earnings Call Transcript

Still Provides Huge Benefits

CVS: Business Valuation

CVS: Business Valuation (Source: Prepared by InvestOhTrader)

The company still offers huge upside potential at today’s price, despite numerous revenue downgrades and a growing yield environment. CVS is still cheap with current earnings of 16.75x, especially when compared to its industry median of 27.18x and forward earnings of 14.40x. Additionally, looking at CVS Health’s EV/EBITDA ratio of 10.53x alongside its industry median of 15.84x and its leading EV/EBITDA of 10.06x, we can safely assume that it is undervalued at today’s prices. I updated the model to today’s increasing return and used a higher discount rate of 7%. This caused the average fair price to drop by $134. However, using its current WACC of 5.77% as the discount rate, the model can offer a 46% upside with an average fair price of $146.

CVS: DCF Model

CVS: DCF Model (Source: Data from SeekingAlpha and Yahoo!Finance. Prepared by InvestOhTrader)

I completed my 5-year DCF model using analyst projections. I maintained an increasing projection on its operating income, as shown in the image above, and still in line with CVS’s financial performance in the first quarter. However, it should be noted that this year’s potential recession triggered by today’s war between Russia and Ukraine can significantly affect a consumer’s daily budget, which I believe can affect demand total company.

Q1 2022 key financial performance

  • In addition to its strong quarterly performance, when considering its total revenue of $298,770 million, we can see a strong growth performance surpassing the challenging $290,912 million figures recorded during the year. prior year, and higher than the $267,908 million recorded in fiscal 2020.

  • As for its operating profit, $3,806 million this quarter was up from $3,321 million in the prior quarter. This translated into an increase in operating margin to 4.96% from 4.83% in the same quarter last year.

  • Additionally, the company’s net income increased to $2,312.00 million from $2,223.00 million in the previous quarter. However, looking at its net margin, it has gone from 3.02% this quarter to 3.23% in the first quarter of 2021. Despite the slowdown in its net margin, it is still impressive as CVS has already accrued litigation costs of 484 million payable over 18 years related to opioid claims by Florida in this quarter.

  • This snowballed to a growing EPS of $1.76 in the first quarter of 2022 from $1.69 in the same quarter a year earlier. Additionally, CVS EPS totaled $6.07, compared to $6.0 last fiscal year and $5.48 for fiscal 2020. However, comparing management’s outlook for its adjusted EPS for the fiscal 2022, which must be between $8.20 and $8.40 per share, to its past performance of $8.40 in fiscal 2021 and $7.50 in fiscal 2020, we We can see some sluggishness that investors and traders should watch out for.

  • According to management, this is in line with its deleveraging strategy in which it expects lower interest payment and lower amortization expense due to continued divestment plans.

Now trade on a logical support

CVS: weekly chart

CVS: weekly chart (Source: TradingView.com)

It took 60 trading days for CVS to get back to the desired level, which is around $95 per share, and I think any price up to $90 is still a good pullback opportunity. CVS is currently trading below its 20-day simple moving average (SMA) and above its 50-day SMA, and a further breakdown of its 50-day SMA could signal significant downward movement.

Key points and concluding thoughts

Looking at its cash balances, CVS generated a declining figure of $8,442 million, compared to $9,408 million recorded in the prior year. This is due to its strong share buyback activity, cited below by management as its all-time high since 2017.

We repurchased approximately 19.1 million common shares in the 3 months ended March 31, 2022, marking the first time the company has repurchased common stock since 2017. Source: Q1 Earnings Call Transcript 2022

In that quarter, management bought $2 billion worth of stock, leaving them with a “only” $8 billion buyback program.

Finally, the improvement in its debt/EBITDA ratio of 4.06x and its debt/equity ratio of 1.03x results from the decrease in its total debt of $75,915.00 million, compared to $85,042 million. for fiscal year 2021 and $75,999 million for fiscal year 2020.

CVS Health’s effort to deleverage, generate meaningful share buybacks, while maintaining a growing dividend with a strong track record of cash flow generation, makes it a buy at current weakness.

Thanks for reading and good luck!