Should CVS Health be in your portfolio?

by Janice Allen
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CVS Health (NYSE: CVS) has been embroiled in a number of controversies over the past month. CVS was recently sued by the New York Attorney General for alleged violation of antitrust laws. In addition, laxatives sold by the company have: recalled after a suspected contamination of the products. This apex of bad news and other factors has had a negative effect on the company’s stock price as it has fallen -10.31% in the past six months. Still, there are some investors who are loading their bags with CVS expecting it to chart higher in the coming years. In this article, we’ll explore some of the reasons why, as well as the downsides of adding to one’s portfolio.



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Poor expected growth rate

Let’s start with CVS’s weaknesses first. The company struggles to grow its revenues on a forward and yearly basis, and its numbers are not attractive compared to its peers in the same industry sector. CVS’s year-over-year revenue growth is 10.61%, while the industry climbs to 17.07%. FWD’s revenue growth expectations are even bleaker at 6.26% compared to 14.80%.
In addition to not being able to competitively grow its revenue, it is also struggling to grow some of its earnings metrics, such as EBITDA, despite strong margins. CVS’s FWD EBITDA growth is at 4.72% with the industry leading the way at 10.78%. This can be disappointing as the net income margin is 2.68%, while the industry struggles with this statistic at -1.87%.

Revisions and momentum is on the side of CVS

The other side of the argument is that CVS has received numerous positive reviews for its earnings per share and revenue targets over the past three months. The company achieved 22 positive EPS revisions and 17 positive revenue revisions. Overall, Wall St considers CVS a buy, judging by its reviews. 10 analysts gave the stock a strong buy and 8 gave it a buy recommendation. The rest rated the stock as a “hold,” with no analyst giving it a sell or strong sell recommendation.
For the more momentum-oriented investors, CVS may be worth a look. CVS outperforms its competitors in the same industry when it comes to price performance. It beats the sector by 45.85% over 9 months and 49.66% over 12 months. Compared to the S&P 500, the company’s profits outperform the market over a longer period of time. CVS returned 72% over three years, while the S&P 500 returned 34.59%. In ten years, however, the company underperformed at 112.57% compared to the index’s 193.83% return.

CVS vs Walgreens Boots Alliance Inc

Wallgreens Boots Alliance Inc (NASDAQ: WBA) makes an interesting comparison with CVS. WBA’s market cap is significantly smaller than CVS’s at 33.90B compared to 125.72B. Losses for WBA were steeper YTD at -23.62% compared to 5.87% for CVS. In addition, the stock’s long-term returns have also diminished, as WBA returned 43.13% over a 10-year period, while CVS returned 166.34%.
In terms of dividends, CVS is stronger, but WBA’s dividend is growing faster. The dividend rate and yield for CVS are $2.15 and 2.24%. The same stats for WBA are $1.92 and 3.65%. As a measure of the dividend growth rate on a 5-year basis, the CAGR of WBA is 4.95%, while CVS lags at 2.24. This may be in part because WBA has seven years of consecutive dividend growth, while CVS has only one.
For valuation, WBA is the clear winner with a FWD P/E ratio of 6.45 compared to CVS’s FWD P/E of 13.68. WBA is also cheaper on a price/sales basis with a ratio of 0.25 to 0.42.

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