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Sales Growth
CVS recorded a sublime second quarter, with year-over-year revenue growth of 11.1%. The group benefited from continued Government service business and a 13.80% year-over-year increase in Medical Memberships.
According to the group’s CEO, Karen Lynch, “This quarter was highlighted by broad sales and earnings outperformance, as well as sequential operating margin improvement.”
Operating Efficiency
I directed the headline numbers and found CVS’ operating efficiency to be the catalyst for its strong numbers. Since June 2020, the company’s days of sales outstanding have decreased by 1.63, while its operating margin has increased by 1.96%. These factors have contributed to an improved year-to-date interest coverage ratio (+21%), subsequently opening up larger after-interest margins for equity holders to benefit from.
Finally, CVS’ net income margin (2.60%) and cash from operations ($14.18 billion) are at a five-year high, which may lead to a dividend payout increase.
Dividend Capacity
I believe CVS has plenty of dividend capacity, especially since it has suspended its share repurchase program and decided to compensate investors with dividends only. With dividends already yielding 2.34%, CVS stock has a free cash flow yield to dividend yield ratio (4.42%) that exceeds its 5-year median by 10.44%. It also has a payout ratio that is still 15.20% lower than its 5-year average.
If we consider these ratios out of isolation and look at CVS’s profitability, it would be impossible to think its dividend capacity isn’t increasing.
Wall Street’s Take
Average CVS price target is $100.50, with a 17.5% upside.
Wall Street thinks the stock is a Strong Buy, with 9 Buy and 1 Hold ratings, and that it will reach the $100 handle within the next 12-months. 5-star analyst Ricky Goldwasser of Morgan Stanley (NYSE:MS) placed the latest and highest price target of $114 on the stock, citing underappreciated cost-cutting and capital deployment as her main reasons.
Concluding Thoughts
CVS looks good all around. Its high-quality and sustainable topline revenue is being accommodated with operational efficiency, which could lead to both capital gains and strong dividend income for investors.
Disclosure: At the time of publication, Steve Gray Booyens had a long position in CVS.
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