Thursday, 7 March 2013

A Look at CVS Caremark


CVS’s enormous dividend increase has made it attractive relative to its Average Dividend Yield. So I did some digging and found a few things I really like.

So what’s to like about CVS…

Average Dividend Yield Analysis*

CVS-N
Year
High Price
Low Price
1Q
div.
2Q
div.
3Q
div.
4Q
div.
Annual Dividend
High Yield
Low Yield
2002
$17.85
$11.52
$0.02875
$0.02875
$0.02875
$0.02875
$0.115
1.00%
0.64%
2003
$18.78
$10.92
$0.02875
$0.02875
$0.02875
$0.02875
$0.115
1.05%
0.61%
2004
$23.67
$16.87
$0.033125
$0.033125
$0.033125
$0.033125
$0.1325
0.79%
0.56%
2005
$31.60
$22.02
$0.03625
$0.03625
$0.03625
$0.03625
$0.145
0.66%
0.46%
2006
$36.14
$26.06
$0.03875
$0.03875
$0.03875
$0.03875
$0.155
0.59%
0.43%
2007
$42.60
$30.45
$0.04875
$0.060
$0.060
$0.060
$0.22875
0.75%
0.54%
2008
$44.29
$23.19
$0.060
$0.060
$0.069
$0.069
$0.258
1.11%
0.58%
2009
$38.27
$23.74
$0.07625
$0.07625
$0.07625
$0.07625
$0.305
1.28%
0.80%
2010
$37.82
$26.84
$0.0875
$0.0875
$0.0875
$0.0875
$0.35
1.30%
0.93%
2011
$41.35
$31.30
$0.125
$0.125
$0.125
$0.125
$0.50
1.60%
1.21%
2012
$49.80
$41.01
$0.1625
$0.1625
$0.1625
$0.1625
$0.65
1.58%
1.31%
2013


$0.225
$0.225
$0.225
$0.225
$0.90


Stock prices are per calendar year.
11y ave
1.07%
0.73%
Dividends are recorded in the quarter they were paid.
5y ave
1.38%
0.96%







3y ave
1.50%
1.15%







5y
$65.37
$93.37







3y
$60.18
$78.49






Super Cheap
$56.34


The table shows the 3 year average dividend yield to be 1.5% ((1.30% + 1.60% + 1.58%)/3). I use the numbers in the “High Yield” column for obvious reasons.

Using the current annual dividend of $0.90, one would have to pay $60.18 for a 1.5% dividend yield.

Buying the stock at its low in 2011 would have earned you an initial yield of 1.6%. Using the current annual dividend, that corresponds to a stock price of $56.34 today (see “super cheap” price in the table above).

Graham Price

CVS’s 2010, 2011 and 2012 EPS were $2.50, $2.59 and $3.03. 3Y Ave EPS = $2.71.
CVS’s BV is $30.63.
Graham Price = SQRT (3Y Ave EPS * BV * 22.5) = $43.19

Cyclically Adjusted Price to Earnings Ratio

CVS’s 10Y Ave EPS = $2.01
CAPE = Stock Price / 10Y Ave EPS = $51.90 / $2.01 = 25.8
A CAPE below 20 is good.

Conclusion

CVS is trading below my super cheap price.

CVS increased EPS from $0.88 in 2002 to $3.03 in 2012. That’s an increase of 3.4 times over 10 years. 2013 and 2014 EPS are estimated at $3.94 and $4.47 respectively.  I find CVS’s past growth and projected growth very attractive.

And finally, CVS is going international. In February 2013, they bought Brazil’s Drogaria Onofre. This tiny purchase (44 stores) signals CVS’s will to expand into emerging markets. As a long-term investor, I find this very attractive.


*My method is not perfect as the stocks low price may have occurred before the annual dividend increase.


2 comments:

  1. I've been thinking of adding CVS to go with my WAG position to have a stake in the 2 major players for pharmacies. If KO and PEP and coexist I think that CVS and WAG can too. I just wish that yield would be a little bit higher although it's good to see that based on the average high dividend yield it's undervalued currently.

    ReplyDelete
    Replies
    1. PIP, The only thing holding me back was my relatively large position in this sector (300 shares of WAG). I did a lot of thinking and I'm going to buy 100 shares of CVS this week. Both companies will profit from the ageing population, and both are going international. I don't think the stock price is necessarily a bargain at $52, but i see the stars lining up for great long-term growth. Plus, I have too much cash and in 4 weeks, I will be adding another 7k to my accounts (tax return).

      Delete