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Dividend Investing Stocks (Archived)

CVS - CVS Health Corp.

Dividend investing is a popular strategy with investors seeking an income stream. Dividend investors can be placed into two broad categories.

  1. The growth approach - buy dividend paying stocks with emphasis on the company's ability to grow and increase its future dividend payments (to maximize the future yield).
  2. The yield approach - buy dividend paying stocks at cheap prices (to maximize the current yield).

Dividend investors using the growth approach tend to look for the same basic growth characteristics as found with growth investing, but the stock must also pay a reasonably reliable dividend.

Dividend investors using the yield approach tend to be more concerned with the stock price and the companies ability and willingness to pay a regular dividend rather than its ability to expand.

Sometimes a company will satisfy the requirements for both approaches.

In the September 2014 issue a fundamental analysis is conducted on a selected sample of stocks. The analysis is based on fundamental data from one year ago. This allows financial students and investors to see how the stock price performed over the next 12 months after the hypothetical purchase.

CVS Health Corp.

CVS Health Corp. NYSE:CVS is a large-cap drug retailer and its stock trades around $260 million per day. CVS is a mature company that was founded in 1892 and has a long established history of paying dividends.

The key fundamentals for CVS are shown below.

Growth fundamentals for CVS

YearRevenueEPS ROEDividendBook ValueEmployees
2003265001.07 14%0.127.6056000
2004305001.13 13%0.148.7078500
2005370001.50 15%0.1510.2080000
2006438001.65 14%0.1712.0096000
2007763001.80 8%0.2421.80120000
2008874002.26 9%0.2724.00125000
2009987002.66 10%0.3225.70127000
2010964002.54 9%0.3927.70122000
20111071002.69 9%0.5429.30124000
20121231003.15 10%0.7130.60130000

The fundamental data above shows that CVS has broadly increased its revenue, earnings, dividends and book value over the last decade. These are the characteristics of an expanding company which indicates that CVS is a growth stock that pays a regular dividend. The annual dividends have increased for every year over the last decade.

Fundamental Analysis for CVS:

The return on equity is reasonable and averages around 10% in recent years. The profit margin (profit to revenue ratio) is quite low and averages around 3%.

The Current ratio (current assets to current liabilities) ranges from 1.2 to 1.8 which indicates that CVS has sufficient working capital.

The debt ratio (long-term debt to tangible assets) averages around 1.5 which means that CVS carries a significant amount of long-term debt. Intangible assets and goodwill are not included in the ratio calculation. The tangible assets are used for the ratio calculation because these are hard physical assets that can be sold off in the event of bankruptcy liquidation whereas intangibles and goodwill cannot be sold.

The total ratio (total liabilities to total assets) averages around 50% which means that CVSs total debt is 50% of its total assets.

Both the revenue and earnings growth for the 2013 fiscal year are projected to grow at 6% (based on the five year growth trends).

The forward PE ratio is around 18 (calculated from the five year earnings growth trend rather than from forecast earnings). The forward PEG is around 3.0.

CVSs book value is around $30 and the current business valuation is around $23 (with a 2.8% ten year Treasury bond yield). This means that CVSs earnings based on its assets is worth more than its ability to growth its earnings. This is not unusual for a mature dividend paying company.

The bankruptcy risk can be calculated using the Z-score. CVSs Z-score is 3.9 which means CVS is a low bankruptcy risk stock.

The sample analysis uses data that is one year old. The hypothetical purchase date for the stock is 23-Aug-2013 and this allows the reader to see how the stock performed over the next year.

CVS had its 2013/06 quarterly results released prior to 23-Aug-2013 and this information is available for the analysis. The 2013 Q2 earnings showed an increase of 120% over the same quarter from a year ago (2012 Q2). The 2013-Q2 dividend is $0.225 for the quarter which is a 38% increase over the same quarter from a year ago (2012 Q2).

Overall the fundamentals are strong with this large-cap dividend paying stock which has some growth characteristics as a bonus. Additional information such as consensus forecast earnings, broker recommendations and insider transactions are not considered for this sample analysis. A hypothetical position taken in CVS on the 23-Aug-2013 would give a purchase price of around $58.

The stock price performance is shown below in Chart 1. along with the annual earnings year to year growth. The stock chart is adjusted for splits and dividends.

Chart 1. Stock chart with earnings for CVS

weekly Chart CVS

As shown in Chart 1. above, CVSs gained around 35% over the next year including dividends. CVSs 2013 annual earnings increased by 15% over the 2012 fiscal year and its 2013 dividends were $0.95 which is an increase of 34% over the 2012 annual dividend.

Stock Analysis for Finance Students and Investors