The current coronavirus pandemic thrust the entire healthcare system under a microscope. Now, daily news reports and conversations center around the number of hospital beds and ventilators, diagnostic testing, new healthcare delivery models like telemedicine, and the discovery and development processes for drugs and vaccines.
Most people probably know CVS Health (CVS -0.96%) because of its widely used retail pharmacy. In fact, CVS fulfills roughly one out of every four -- 26.6% to be exact -- retail pharmacy prescriptions in the U.S. With nearly 9,900 retail locations and 1,100 walk-in clinics, CVS aims to be the "trusted front door to healthcare."
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The spectrum of businesses operated by CVS reaches into many corners of the U.S. healthcare system. In addition to its retail pharmacies and clinics, CVS runs a dedicated senior pharmacy care business serving more than 1 million patients annually. It provides another 37 million with traditional healthcare insurance products bolstered by its acquisition of health insurer Aetna in 2018. CVS also operates as a pharmacy benefit manager for approximately 105 million individuals. That's nearly one-third of the U.S. population!
With a variety of product offerings and millions of customers, should healthcare investors get excited about the prospects of owning CVS?
Revenue growth
In 2019, CVS earned $15.3 billion on revenue of $256.7 billion. Total revenue jumped 32% over the prior year, but don't expect it to keep up at that pace. The increase can be attributed to CVS' acquisition of the health insurer Aetna for approximately $70 billion.
CVS' largest segment, pharmacy services, generated $141.5 billion in sales, resulting in net income of $5.1 billion. Investors should note this business is not seasonal in nature, providing stability to the company. The retail and healthcare benefits businesses brought in revenue of $86.6 billion and $69.6 billion, respectively.
Sizable debt
CVS' debt swelled significantly to acquire Aetna. Long-term debt on CVS' balance sheet peaked at $71.4 billion at the end of 2018. Roughly $9.74 billion was paid off in 2019, lowering the total to $64.7 billion. As reference, CVS maintained long-term debt in the mid-20 billions prior to the Aetna acquisition.
CVS will need to pay $5.5 billion in 2020 to cover interest payments and tranches of debt that are due. The interest rates on its notes currently range from 3.125% to 5.05%. If interest rates remain low, CVS could potentially refinance some of the notes to lower rates.
Growing business, flailing stock
While CVS' business continues to grow, the stock performance failed to follow suit. In the company's annual 10-K report filed with the Securities and Exchange Commission, the stock performance graph shows underperformance over the past five years compared to the S&P 500 index, the S&P 500 Food and Staples Retailing index, and the S&P 500 Health Care Sector index. Even worse, investors would have lost money in CVS while the other indexes gained 40% to 75%.
The market capitalization or value of the company hovered around $82 billion for the past three years, with a few dips and gains along the way. The stock price, however, declined 20% over the same period. The reason? CVS issued an extra 300 million shares during the period.
CVS shelled out $2.6 billion in dividends in 2019. The current $2 per share dividend equates to roughly 3.2% return. That's a nice benefit, but certainly not significant enough to turn an investor into a millionaire.
Investor takeaway
CVS provides healthcare investors with a diversified, dividend-yielding business that affects a substantial portion of the U.S. population. It expects to have cash flow from operations in the $10.5 billion to $11 billion range this year.
CVS continues to execute on its growth plans, expanding into pharmacy delivery as well as clinics for oncology and chronic kidney care. It needs to achieve its estimated $800 million to $900 million in cost savings from the Aetna acquisition. Importantly, it still has a mountain of debt to manage.
Despite the growth and strategic acquisitions, the stock has yet to make meaning moves. It's going to take a very long time or a huge ownership stake in CVS to turn anyone into a millionaire. That does not mean it's a bad stock -- its size, stability, and dividend may be appropriate for some investors based on their risk tolerance and time horizon. However, in the near term, other healthcare stocks offer more potential upside.
