After underperforming throughout 2024, shares of CVS Health(NYSE: CVS) are surging. From the end of 2024 through Feb. 14, the stock climbed 46.7% higher.
Shares of the healthcare conglomerate stock notched significant gains after management presented an encouraging fourth-quarter earnings report on Wednesday, Feb. 12. Adjusted earnings that reached $1.19 per share were 29% above the average estimate from Wall Street analysts who follow the company.
CVS Health stock is way up but still offers a juicy 4% dividend yield at recent prices. Could it be a smart buy now for income-seeking investors? Below, I’ll weigh some of the company’s strengths against its weaknesses to find out.
You’re likely familiar with CVS Health’s ubiquitous chain of retail pharmacies, but this is a somewhat minor part of the conglomerate’s overall operation. The company also operates a leading pharmacy benefits management (PBM) business and Aetna, the medical-insurance giant.
On their own, CVS Health’s healthcare-related businesses don’t offer investors much to get excited about. Bringing these operations under one roof, though, gives the company enough scale-related cost advantages to generate relatively reliable profits.
CVS Health stock fell hard last year because a surprisingly high level of utilization from Aetna members lowered profits. Aetna’s ratio of benefit costs as a percentage of premiums received was a very healthy 84.2% in 2019. That figure dipped at the beginning of the pandemic but shot up to 92.5% last year.
Rising healthcare expenses aren’t a new phenomenon. CVS Health will pass on the increasing expenses to its customers by raising premiums. As a leading employer of healthcare providers, CVS Health also enjoys significantly more control over rising healthcare expenses than its smaller peers.
Earnings have fallen but are still strong enough to meet CVS Health’s dividend commitment. Management expects adjusted earnings for 2025 to land in a range between $5.75 and $6 per share. That’s enough to support a dividend set at just $2.66 per share annually and reduce the company’s debt load.
Despite pausing annual dividend payout raises for a few years to support the Aetna acquisition, CVS Health has raised its dividend payout by 90% over the past decade. By using a combination of cost controls and rising premiums, Aetna can push down its medical-benefit ratio again in another year or two. This could lead to big dividend payout raises over the next several years.
Last September, the Federal Trade Commission (FTC) sued CVS Health, UnitedHealth, and Cigna. The operators of the nation’s three largest PBMs created a broken rebate system that inflated drug prices at the expense of vulnerable patients, according to the FTC.
CVS Health’s Health Services segment, the one that houses its PBM operation, is responsible for over 60% of total adjusted operating income. Unfortunately, the FTC isn’t the only entity displeased with the company’s PBM operation. In 2023, Blue Shield of California replaced CVS Health’s PBM by contracting with Amazon Pharmacy and Mark Cuban’s Cost Plus Drugs.
Due, in part, to CVS Health’s loss of business in California, revenue and operating income from the Health Services segment declined in 2024.
California probably won’t be the last state to make trouble for CVS Health’s PBM business. In 2023, Oklahoma established new administrative procedures for enforcement actions against PBMs. The first complaint, which was brought in January, accuses CVS Health of under-reimbursing pharmacies throughout the state.
In CVS Health’s fourth-quarter report, the company’s new CEO David Joyner was quick to highlight the company’s integrated model. I’m taking this as a sign that management isn’t about to split up operations that, until recently, had generated steadily growing profits. This is a great sign and a key reason I’m not in a hurry to sell any of my CVS Health shares.
While I’m not selling my CVS Health stock, concerns about the direction of the PBM industry make acquiring more shares seem like a bad idea. It’s probably best to watch this stock from a safe distance for at least a few more quarters.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Cory Renauer has positions in Amazon and CVS Health. The Motley Fool has positions in and recommends Amazon. The Motley Fool recommends CVS Health and UnitedHealth Group. The Motley Fool has a disclosure policy.
