CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Stock of the week: CVS Health

12:16 12 July 2019

Summary:
- CVS Health (CVS.US) operates the largest chain of pharmacies in the US
- Company still has not recovered from early-year share price plunge
- Small exposure to trade conflicts and economic downturn
- Dividend increases were frozen to help the company cope with the Aetna merger
- Share price broke above the upper limit of the consolidation range this week

CVS Health (CVS.US) operates the largest chain of pharmacies in the United States. The stock has not recovered yet from the major share price drop it has experienced on the back of a major write-down earlier this year. In this short analysis we will take a closer look at the company.

CVS Health generates revenue from two primary sources: retail pharmacies and pharmacy benefit management plans (PBM). As a pharmacy benefit manager, CVS Health, for example, handles some of the negotiations with drug manufacturers for health insurers. As one can see, the significance of this activity for the company has grown substantially over the past decade or so. Bloomberg, XTB Research

In spite of the S&P 500 index being 20% higher YTD, the share price of CVS Health is over 10% lower than at the end of 2018. The S&P 500 Health Care Providers & Services index, which CVS Health is a part of, is quoted more or less flat YTD therefore poor performance of CVS cannot be blamed on industry weakness. What has happened? CVS Health stock experienced major repricing in February 2019 when the company announced that it had to make a $6.1 billion writedown related to its 2015 acquisition of Omnicare and informed that it has suffered a loss in the Q4 2018. To make things worse, the company said that it expects some of its units to see declining earnings this year due to changes to its long-term care business and investments.

For the major part of the past decade, CVS Health experienced constantly improving margins. However, over the past year there were two major plunges in earnings related to the acquisition of Aetna. While the merger will continue to be a drag on the company for some time, improving gross margin bodes well for the future. Source: Bloomberg, XTB Research

It should be noted that CVS Health’s earnings last year were distorted by the merger with Aetna, which was completed in November 2018. However, the company expects its earnings to reach pre-merger levels again in 2020 or even 2019. The company has a solid track record of revenue increases - from 1995 to 2018 CVS Health experienced only one annual decline in sales (-2.48% in 2010). Another thing that could support CVS Health in the future is its increasing diversification -  CVS acquired Aetna, the US company operating in the health insurance market, in the previous year. While the pharmacy business, that accounts for the majority of CVS’ revenue, may be cycle-neutral (we will elaborate on it in the next paragraph) it is not indifferent to competition. Having said that, making business more diversified should act in company’s favour.

When it comes to CVS Health, its liquidity ratios may be a thing of concern. The company saw deteriorating liquidity ratios since the beginning of 2014. A significant rise at the end of 2017 was a result of repatriating foreign earnings that greatly increased the company's cash balance. A bulk of this cash was later used for acquisitions and mergers. Source: Bloomberg, XTB Research

When it comes to equity markets there are two main sources of concern nowadays: slowdown in the global economy and trade wars. These two issues are to some extent interrelated as escalation of trade wars is likely to accelerate the slowdown. However, trade wars can be especially harmful for some companies as they may see their supply chains distorted. This is not the case for CVS Health as its operations are almost fully focused in the United States. Moreover, the economic downturn also does not seem to be much of a concern as people will buy medicines in spite of whether the economy is expanding or contracting. Having said that, business of CVS Health seems to be shielded from risks that are now the primary reasons for investors’ unease.

The last time CVS Health lowered its dividend was in 1996. Since then the company has raised cash dividend almost every year before hikes were frozen in 2017. The company will restart dividend increase once it gets past Aetna merger. Source: Bloomberg, XTB Research

CVS Health paid out a dividend of $2 per share in 2018, unchanged against the previous year. The dividend is also expected to remain at $2 this year. A pause in dividend hikes is definitely not what shareholders want to see therefore such a decision should be well reasoned. CVS Health reasoned the decision saying that it will refrain from rising dividend in order to deleverage the company after merging with Aetna. Current dividend does not seem to be in danger as the payout ratio sits well below 50% and with expected increase in earnings in 2019 and 2020 it is set to drift even lower. A dividend of $2 per share translates into a yield of around 3.6% at current valuations and this places CVS Health among 80 highest-yielding dividend stocks in the S&P 500 index. 

CVS Health (CVS.US) stock took a major dive in early-2019 before the price locked itself within a consolidation range. After a three months of trading sideways the stock finally broke above the $57.60 handle as concerns over potentially damaging regulatory action against the healthcare sector eased. Nevertheless, bears managed to erase much of this gain yesterday. Source: xStation5

This content has been created by X-Trade Brokers Dom Maklerski S.A. This service is provided by X-Trade Brokers Dom Maklerski S.A. (X-Trade Brokers Brokerage House joint-stock company), with its registered office in Warsaw, at Ogrodowa 58, 00-876 Warsaw, Poland, entered in the register of entrepreneurs of the National Court Register (Krajowy Rejestr Sądowy) conducted by District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register under KRS number 0000217580, REGON number 015803782 and Tax Identification Number (NIP) 527-24-43-955, with the fully paid up share capital in the amount of PLN 5.869.181,75. X-Trade Brokers Dom Maklerski S.A. conducts brokerage activities on the basis of the license granted by Polish Securities and Exchange Commission on 8th November 2005 No. DDM-M-4021-57-1/2005 and is supervised by Polish Supervision Authority.

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