111 Capital's $1.13M Bet on CVS: Don’t Miss Out!

Dividend Policy and Yield

CVS has a long track record of paying dividends. In fact, it “has paid cash dividends every quarter since becoming a public company” (www.sec.gov). The dividend was held steady at $0.50/quarter during the debt-reduction years following the 2018 Aetna acquisition, but growth resumed in late 2021. CVS hiked its quarterly payout to $0.55 in 2022 (from $0.50 in 2021) and to $0.605 in 2023 (www.sec.gov). In December 2023, the board approved another 10% increase to $0.665 per share, effective 2024 (www.sec.gov) (www.prnewswire.com). This marks two years of dividend raises after a multi-year pause, reflecting management’s renewed confidence.

At recent stock prices, CVS offers a high dividend yield for a large healthcare company. After a 16% share price drop earlier in 2024 on a guidance revision, the yield swelled to about 4.7% (www.nasdaq.com). For context, CVS’s dividend has grown 142% over the past 10 years (www.nasdaq.com), a testament to its long-term commitment to returning cash to shareholders. The current yield (~4–5%) is well above the S&P 500 average, indicating the market’s cautious view and potential value for income-focused investors. Importantly, CVS’s dividend policy remains cautious yet shareholder-friendly – future raises will depend on earnings growth, but the company has demonstrated willingness to resume dividend growth once leverage came down (www.sec.gov).

Cash Flows and Coverage

CVS’s dividend appears well-covered by earnings and cash flow. In 2023, the company generated $13.4 billion in cash flow from operations (www.prnewswire.com), while returning $3.1 billion to shareholders in dividends (www.prnewswire.com). This implies a payout of only ~23% of operating cash flow, leaving ample buffer for reinvestment and debt service. Even after capital expenditures, free cash flow topped $10 billion in 2022, easily covering the roughly $3 billion annual dividend and funding share buybacks and debt reduction (portfolio-strategy.apsec.com). Management guided 2023 operating cash flow of $12.5–13.5 billion and capex around $3 billion, implying ~$10 billion of free cash flow – more than 3× the dividend outlay (portfolio-strategy.apsec.com). In other words, CVS’s dividend payout ratio (on an FCF basis) is comfortably low, and even its GAAP earnings payout was only ~37% in 2023 (using $6.47 EPS).

Interest coverage is also solid. CVS’s interest expense was about $2.6 billion in 2023, up 16% from the prior year after new debt for acquisitions (www.prnewswire.com). Yet, operating profit (even on a GAAP basis) was over $13.7 billion (www.prnewswire.com) – roughly 5× the interest cost, indicating healthy ability to service debt. On an adjusted basis, CVS earned $8.74 per share in 2023 (www.prnewswire.com), while paying out $2.42 per share in dividends – a ~28% payout ratio on adjusted earnings. All these metrics underscore that CVS’s dividend is well-covered by both profit and cash flow. The company’s stable cash generation (from diversified pharmacy, insurance, and healthcare services streams) and investment-grade credit profile support its capacity to maintain and gradually increase the dividend. (Note: As a standard corporation, CVS does not report AFFO/FFO like a REIT; instead, free cash flow is the relevant metric for dividend coverage.)

Leverage and Debt Maturities

CVS carries a significant debt load from its expansion into healthcare. At year-end 2023, total debt stood around $60 billion (up from ~$50 billion a year prior, due to financing of the Signify Health and Oak Street Health acquisitions) (www.sec.gov). Despite this, the company’s credit remains investment-grade – rated Baa2/BBB with a Stable outlook by Moody’s and S&P (www.sec.gov). These mid-BBB ratings reflect a moderate leverage profile that is acceptable for a firm of CVS’s size and cash flow. CVS ended 2022 at about 2.9× net debt/EBITDA (3.1× gross), and management projected leverage would rise to the mid-3× range after the 2023 acquisitions, still within the comfort zone for BBB ratings (portfolio-strategy.apsec.com). In fact, ratings agencies did not downgrade CVS on the deals, acknowledging that leverage would remain within the allowed range for the rating (portfolio-strategy.apsec.com) (portfolio-strategy.apsec.com). The company has a history of deleveraging post-acquisitions, having paid down roughly $25 billion of debt since the 2018 Aetna deal (portfolio-strategy.apsec.com). While CVS no longer targets ultra-low leverage (<3×) given its growth investments, management remains committed to keeping net leverage under ~4× to preserve its mid-BBB credit rating (portfolio-strategy.apsec.com).

Debt maturities: CVS’s debt maturity profile is manageable. Only about $1.7 billion of debt matured in 2023 (portfolio-strategy.apsec.com), and near-term maturities in 2024–2025 are relatively modest compared to the company’s cash flow. In 2023, CVS even issued ~$10.9 billion of new bonds (at 5–6% interest rates) to refinance obligations and fund acquisitions (www.sec.gov) (www.sec.gov). The next major bond due isn’t until February 2026 ($750 million 5.00% notes), followed by a handful of maturities spread out into the late 2020s and beyond (www.sec.gov). By staggering its debt and occasionally using cash on hand to redeem near-term notes, CVS avoids any near-term “wall” of debt coming due. The firm also has ample liquidity via committed credit facilities and a commercial paper program (rated P-2/A-2) (www.sec.gov). Overall, leverage is elevated but not excessive for CVS, and the absence of imminent large maturities gives management breathing room to reduce debt further over time.

Valuation and Comparables

CVS stock appears undervalued by multiple metrics. After this year’s sell-off, shares trade at roughly 6–8× earnings, depending on the earnings measure. CVS cut its 2024 adjusted EPS outlook to at least $8.30 (www.prnewswire.com); even using this lower guidance, the forward P/E is around 7× at recent prices (mid-$50s per share). That is a steep discount to the broader market (S&P 500 forward P/E ~18×) and also cheaper than most healthcare peers. For example, pure-play health insurers and PBMs trade in the low double-digit multiples, and even rival Walgreens Boots Alliance (which faces deeper challenges) historically traded near 8–10× earnings. Similarly, on an EV/EBITDA basis CVS trades in the high single digits – a conservative valuation for a stable cash-flow business. The dividend yield near 5% is also indicative of a low valuation. By contrast, the average S&P 500 stock yields ~1.5%, and even many healthcare stalwarts (like insurers or pharma makers) yield under 3%. The market’s caution seems to price in significant execution risk for CVS.

However, if CVS can hit its earnings and cash flow targets, the valuation looks compelling. The stock’s 4.7% dividend yield (after the drop) provides solid income (www.nasdaq.com), and any stock price recovery would add capital appreciation. Notably, CVS’s dividend growth of 142% over the last decade outpaced many peers (www.nasdaq.com), reflecting its earnings growth and shareholder returns prior to the Aetna deal. The current low multiple might not fully credit CVS’s position as a diversified healthcare platform. With its integrated model, CVS has revenue nearing $350+ billion and adjusted EPS power in the high single digits, yet the market is valuing it more like a no-growth retailer. This disparity suggests upside if the company can dispel fears (or if investors seek defensive value plays). Comparables: CVS’s closest peer on the pharmacy side, Walgreens (WBA), trades at ~6× forward earnings but is struggling with declining profits and a frozen dividend. On the insurance side, UnitedHealth (UNH) trades near 15× earnings with a ~1.5% yield. In that context, CVS’s ~7× multiple and 5% yield highlight a valuation gap. The key question is whether CVS’s diversified model deserves a higher valuation or if its complexity warrants the current discount – a topic we address in the risk section.

Risks and Red Flags

Despite its strengths, CVS faces several risks and potential red flags that investors should monitor:

- Health insurance cost pressure: CVS’s Aetna segment has recently been hit by higher-than-expected medical cost trends, especially in Medicare Advantage plans (www.nasdaq.com). In early 2024, utilization rates spiked, and the government’s updated star rating system lowered some of Aetna’s reimbursement rates, forcing CVS to cut its earnings guidance (www.nasdaq.com). This highlights the risk that medical inflation or regulatory changes can squeeze margins in the insurance business. Such surprises led to a ~16% one-day stock drop in 2024 (www.nasdaq.com). Ongoing Medicare Advantage challenges (industry-wide) will need careful management to avoid further profit shortfalls.

- Pharmacy benefit manager (PBM) scrutiny: CVS’s Caremark PBM (which handles prescription benefits for insurers and employers) is under the microscope of regulators. There is intensifying regulatory and political scrutiny of PBM practices amid claims they drive up drug costs. In mid-2023, the FTC and lawmakers probed how PBMs earn rebates and steer patients to their own pharmacies (www.axios.com). A federal report found major PBMs (Caremark, Express Scripts, Optum) collected billions by marking up specialty drug prices (www.axios.com). Several states and the FTC have considered actions to curb PBM fees and potentially ban certain rebate practices. Any regulatory reforms targeting PBM profit models pose a risk to CVS’s high-margin Caremark unit. (Notably, an FTC lawsuit against CVS’s PBM was filed in 2023 and later paused, indicating the situation is in flux (apnews.com).) This is a key regulatory overhang to watch.

- Integration and execution risks: CVS has transformed from a retail pharmacy chain into a broad health conglomerate. While the integrated model offers synergies, it also brings complexity. Stronger segments can be dragged down by weaker ones under one umbrella (www.axios.com). For example, soft retail pharmacy results or clinic losses can dilute the robust profits from Caremark or Aetna. As one analysis noted, CVS’s successful divisions are “vulnerable to the pressures” of underperforming parts, and “creating efficiencies is easier said than done.” (www.axios.com) The 2023 acquisitions of Oak Street Health (primary care clinics) and Signify Health (in-home health services) add integration risk as CVS must merge thousands of new employees and operations into its system. Executing on the promised synergies – like expanding Oak Street clinics and achieving over $500 million in value-based care synergies (portfolio-strategy.apsec.com) – is not guaranteed. If integration falters or cost synergies don’t materialize as planned, CVS could face write-downs or continued earnings drag from these new businesses. (Indeed, by 2025 CVS had to slow clinic expansion and take a charge for Oak Street’s operations (apnews.com), underscoring this risk.)

- Retail pharmacy headwinds: The legacy retail pharmacy business (CVS’s ~9,000 drugstores) is mature and facing industry pressures. “Retail pharmacy in general is struggling” due to competition from online entrants and reimbursement pressure (www.axios.com). Front-of-store sales have been soft as more shopping shifts online, and pharmacy margins are squeezed by lower reimbursement rates from payors. Rival Walgreens’ stock collapse (down ~50% in 2022–2023) exemplifies the challenges in this space (www.axios.com). CVS is responding by closing 900 underperforming stores (10% of its footprint) by end-2024 and rolling out new healthcare-focused store formats. Still, declining foot traffic and slim prescription margins are a structural risk. If the retail segment stagnates or requires heavy investment to reinvent, it could continue to weigh on consolidated results.

- One-time charges and liabilities: CVS’s broad reach exposes it to legal and regulatory liabilities. In 2022 the company took a $5.8 billion charge for opioid litigation settlement and a $2.5 billion write-down of its long-term care pharmacy business (www.prnewswire.com). While these were largely one-time events (the opioid payouts will be spread over 10 years), they highlight potential “red flag” costs lurking in healthcare. Future liabilities could arise from issues like data privacy, pharmacy malpractice, or further industry litigation. Additionally, the opioid settlement will cost CVS roughly $500 million per year over the next decade, which slightly limits cash available for other uses (though CVS has built this into its capital plans (portfolio-strategy.apsec.com)). Investors should stay attuned to any sizable legal risks or goodwill impairments that may emerge as CVS reshapes its business.

Open Questions and Outlook

CVS Health’s transformation and recent stumbles leave several open questions for investors going forward:

- Will healthcare cost trends normalize? A key uncertainty is whether the elevated medical cost ratios that hurt Aetna’s profits are a temporary post-pandemic effect or a new normal. CVS is adjusting pricing and benefits to account for higher utilization, but if costs remain high (e.g. an older, sicker member mix), insurance margins could stay under pressure. Can CVS’s insurance unit return to growth in 2024–2025, or will it be an ongoing drag?

- Can the new acquisitions deliver promised growth? CVS paid almost $18 billion combined for Signify and Oak Street Health to accelerate its push into value-based care. The success of these deals is an open question. Optimistically, CVS projects Oak Street’s clinics can generate over $2 billion in embedded adjusted EBITDA by 2026 if scaled as planned (portfolio-strategy.apsec.com). But achieving that means rapidly opening profitable clinics and integrating patient data with Aetna – no easy task. Investors will be watching the performance of Oak Street clinics and Signify’s home health services to see if CVS can realize a return on this investment. Any signs of continued losses or slower expansion will raise concerns that CVS overpaid or overextended in its diversification strategy.

- Is the sum greater than the parts? With its vertical consolidation, CVS hoped for an “ecosystem” advantage (retail pharmacies driving insurance savings, etc.). So far, results are mixed. This raises the question: Would CVS be worth more broken up into separate companies? In 2024, reports surfaced that a breakup was being discussed under pressure from some investors (www.axios.com). Management insists it is focused on the integrated model and creating value across the businesses (www.axios.com). Most analysts doubt a breakup is imminent (www.axios.com). However, if CVS’s stock continues to languish, calls to “unlock value” by separating the faster-growing segments (like Caremark or Aetna) from the retail arm may get louder. The company’s stance on portfolio adjustments (divestitures, spinoffs) remains an open question, and any hints of strategic shifts will be important to monitor.

- How will regulation shape CVS’s future? From drug pricing reform to possible PBM rule changes and Medicare Advantage rates, policy outcomes in Washington could materially impact CVS. Will the pharmacy benefit business need to overhaul its rebate model? Will Medicare tweak payment formulas to ease insurers’ loads? These unknowns inject forecast risk. CVS is actively lobbying and adapting (e.g., its newly announced transparent pricing models like CostVantage™ for PBM (www.prnewswire.com)), but until new rules are set, there’s uncertainty. Investors should watch for legislative developments in drug pricing and insurance that could alter CVS’s economics.

Bottom Line: CVS Health offers a blend of a stable, cash-generative core and a strategic growth play in healthcare services – all trading at a beaten-down valuation. 111 Capital’s $1.13 million bet suggests some savvy investors see value here. The company’s dividend is secure and growing, and its balance sheet is on a path to gradual deleveraging, which together provide downside support. To unlock upside, CVS will need to execute on improving its healthcare benefits segment and proving the worth of its recent acquisitions. If it succeeds, the current pessimistic pricing could prove excessive. However, patience and careful monitoring are warranted. CVS must navigate the risks discussed – from cost pressures to regulatory shifts – before the market fully rewards its “healthcare conglomerate” strategy. For investors, the stock’s depressed valuation and rich yield may compensate for these uncertainties, but keeping an eye on the open questions above is crucial. Don’t miss out on the opportunity, but go in with eyes open to both the potential and the pitfalls that lie ahead.

Sources: Inline citations reference the latest CVS 10-K filing (www.sec.gov), the Q4’23 earnings release (www.prnewswire.com) (www.prnewswire.com), and reputable financial analysis and news outlets. Key insights were drawn from CVS’s investor disclosures, a SanCap credit research report (portfolio-strategy.apsec.com) (portfolio-strategy.apsec.com), The Motley Fool via Nasdaq (www.nasdaq.com) (www.nasdaq.com), and Axios news reports (www.axios.com) (www.axios.com), among others, to ensure a factual and balanced evaluation of CVS Health.