CVS's Deleveraging Efforts Improve Dividend Outlook

This year, CVS Health raised its dividend by 10% after keeping the payout frozen for five years as the company prioritized deleveraging efforts, following the sizable 2018 acquisition of health insurer Aetna.

With leverage reduced to pre-acquisition levels, CVS now intends to keep raising the annual payout in line with earnings growth. This plan implies the dividend is likely to grow at a high single-digit pace in the years ahead.
Source: Simply Safe Dividends

Given a much-improved balance sheet and the firm's ability to generate a reliable and growing cash flow stream from its essential health care services, we are upgrading CVS's Dividend Safety Score from Safe to Very Safe. This upgrade is further grounded in the company's conservative payout ratio near 30%, which can cushion the dividend under challenging times.

After receiving a pandemic boost from Covid testing and vaccinations in 2021, earnings are expected to moderate this year. However, CVS's dividend should remain well covered, and the firm's diversified business can provide a solid foundation for future growth.

While CVS is best known for its chain of retail pharmacies (30% of profits), the company also generates income as a pharmacy benefits manager (46%) that negotiates drug prices on behalf of clients like insurance companies and as a health insurer (25%) through the Aetna acquisition.

Each of these operating segments has proven complementary to one another, with CVS able to direct customers between services. 

For example, CVS can send an insurance client with an ear infection to one of its growing number of MinuteClinics, which are often more affordable and convenient than urgent care alternatives. Health professionals at these clinics can then direct patients needing prescribed medicines to CVS's vast pharmacy network, which fills nearly 40% of retail prescriptions in the U.S.

This model allows CVS to touch a customer at multiple points along the health care value chain, which provides more income opportunities for the company while simplifying patients' health care needs.

On top of integrating health services, CVS has been proactive in developing digital tools to keep patients more connected while providing more convenient healthcare options like telehealth.

Overall, CVS has positioned itself as a health solutions leader able to provide customer services on multiple fronts. As the health care industry looks to take out more costs in the years ahead, CVS's vertical integration should help the company be part of the solution while rewarding shareholders with dividend growth along the way.

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