When healthcare access for elective surgeries was restricted, many patients delayed procedures that were not life-threatening, such as joint replacement surgery. Those patients have largely returned to healthcare facilities, and it has put tremendous pressure on insurance providers to meet surging medical costs.
Those factors caused CVS (NYSE: CVS) to downgrade its 2024 full-year earnings guidance, even after the company reported a strong end to 2023.
CVS may be most identified with its chain of retail pharmacies, but the company has also been an insurance provider since its $69 billion acquisition of Aetna in 2018.
That deal was part of a coordinated drive by CVS to become a much larger-scale healthcare conglomerate. But even though the company’s insurance segment may underperform over the next year, CVS reported revenue gains across the board in Q4 2023.
The reduced outlook for this coming fiscal year overshadowed any excitement around what was otherwise a strong quarter for the company.
As a result, CVS stock is now down 10.5% over the past 12 months, including an 8.2% drop year-to-date. For a company that just beat revenue and earnings expectations and raised its high-yield dividend, sentiment is brewing that the stock could be oversold.
So is CVS a stock you can count on, and can you trust its dividend?
What Triggered CVS Stock To Drop?
CVS closed out last year with $93.81 billion in revenue for the 4th quarter, an 11.9% increase from 2022. The top line was 3.41% better than analysts expected.
Net income of $2.05 billion was 12% lower than in 2022 and diluted earning per share (EPS) worked out to $1.59. Despite the year-over-year drop, it beat analysts’ EPS expectations by 6.5%.
CVS reported impressive growth out of its Health Services segment for the quarter, with $49.15 billion in revenue. That was a 12.3% increase from the same quarter of 2022. The Health Services segment includes CVS Caremark, which negotiates prescription drug prices with insurance providers and drug manufacturers.
This division processed 600.8 million pharmacy claims in the quarter, which is slightly up year-over-year. CVS attributed the increase in revenue to inflation and new higher-priced, complex treatments.
Management also reported an 8.6% year-over-year increase in sales from its Pharmacy and Consumer Wellness segment. This division includes the company’s over 9,000 brick-and-mortar retail stores. The Insurance segment actually logged 16% sales growth in the 4th quarter, but that was short of analysts’ expectations.
CVS dropped its full-year EPS expectation for 2024 to $8.30, down from $8.50 per share previously.
Will CVS Stock Go Back Up?
That downgrade was the factor that loomed largest for investors, and it’s why CVS share price has been on a downtrend. But there are plenty of reasons to believe that CVS can weather higher medical costs over the short term. The company announced a series of new initiatives in the 4th quarter.
CVS CostVantage will restructure all of the company’s prescription drug pricing to make drug purchases more transparent and cost-effective. The model should go into effect in 2025, and it’s intended to answer critics who say that prescription drug prices (and related fees) aren’t clearly defined.
The company also announced that all of its Health Services brands will be rebranded under the CVS Healthspire name. Those brands include Caremark, Cordavis, Signify Health, and MinuteClinic, among others. More than just a rebranding, the company also hopes to achieve increased synergy in the segment.
CVS Analyst Ratings Are Optimistic
Despite concerns about the insurance segment, Wall Street still believes CVS is a winner.
70% of the analysts covering the stock rate it as a Buy. The highest forecast would result in a leap higher of 34.79% to $101 per share over the next year.
The median price target is $90 per share, equating to a 20.11% increase from present levels. There isn’t a single Sell rating on the stock, with the remaining analysts calling it a Hold.
The lowest forecast for CVS stock is $74 per share, which translates to a 1.24% drop over the next 12 months.
Is CVS Dividend Safe?
CVS dividend yield of 3.61% appears safe because its payout ratio is just 37.54%, well below the 100% threshold that triggers safety concerns. Shareholders receive an annualized payout of $2.66 per share paid quarterly.
In the 4th quarter, the company announced a 10% increase in its quarterly dividend. In 2023, the company returned an impressive $3.1 billion to its investors.
With the reduced outlook for the year, however, some investors might wonder how long that dividend can last. Especially after recent news that Walgreens was cutting its dividend due to recent revenue struggles.
The bottom line is given the current payout ratio, the strain of dividend payouts isn’t likely to stress the company, even if CVS underperforms in the Insurance segment this year.
Is CVS A Good Stock to Buy?
On the whole, analysts believe that CVS shares are due to bounce back. That conclusion would appear to be backed up by the company’s price-to-earnings (P/E) ratio of 11.4.
That’s a good deal lower than pharmacy competitor Walgreen’s P/E of 31.64. It’s also lower than insurance carriers Cigna and Humana, which have P/E values in the high teens.
CVS has become one of the largest healthcare brands in the world, and it beat estimates for both revenue and earnings in the 4th quarter of 2023.
Revenue grew in every segment, most especially in the Health Services division. The company has also announced new initiatives that should increase engagement and drive sales.
The stock dropped due to concerns that the insurance segment will underperform because of rising medical costs. It’s an issue that should be short-lived, as patients catch up on procedures previously postponed.
CVS share price was trading above $100 at the tail end of 2022 and it seems to have plenty of room to rise from here. Add in a reasonable P/E value and a high-yield dividend and there’s a lot to like about CVS. It certainly looks like a stock that long-term investors can count on for years to come.
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