CVS Dividend – Slowing Or Growing?
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
CVS Caremark (NYSE: CVS) is a company that I've followed for a while, but I truthfully always preferred Walgreen (NYSE: WAG). I figured that while CVS played second fiddle to Walgreen, that it was better to invest in the leader in the retail pharmacy field. Well that has certainly changed in the last few months.
With Walgreen deciding to end their relationship with Express Scripts, the backlash has been fierce and obvious. Same store sales for the chain have taken a beating, dropping sequentially in the last 4 months to negative about 8.5% as of March. The primary beneficiary of this ended relationship has been CVS and other pharmacies. In doing some research for this post, I found that maybe I should have been looking at CVS more closely before these recent developments. The company's dividend has been raised for the last nine years in a row. Next year the company in theory will hit that impressive 10 straight years mark. From what I've found, this is just the beginning of the dividend streak.
When it comes to the company's current dividend, to say that it seems safe is a vast understatement. Look at the trend in the free cash flow payout ratio over the last three years:
You can see not only has the ratio dropped, it has dropped significantly. At last count, CVS is paying out just under 17% of their free cash flow. Clearly the company has room to raise the dividend even if they were not expected to grow earnings and cash flow at all in the future.
The good news for investors is not only is the company expected to have good growth going forward, but the company has shown they are willing to give a lot more back to shareholders. At current prices the company's dividend yield is just 1.46%. However, if you look at what has been happening with dividend growth, I believe this percentage will continue to rise quickly.
In the last 9 years, the company shows only two times they increased the dividend by less than 10%. Even more impressive is, in the first five years of this streak the average increase was just over 16%. This would be a good enough number for most companies, but as CVS' free cash flow has grown, the company has raised this average increase to over 28% in the last four years.
So what should investors expect in the future? Analysts expect growth in EPS of about 11.66%. However I think the longer the Walgreen and Express Scripts fiasco drags on, the better CVS will do. Even if Walgreen does manage to patch things up, many people who have transferred prescriptions to CVS won't switch back. With a payout ratio of just under 17%, and expected earnings of say 12%, I don't think it's unreasonable for CVS stockholders to expect dividend growth of somewhere in the 15-20% range. At CVS' current pace of cash flow growth, even multiple years of 20% dividend growth would still leave the payout ratio under 50%. With the stock selling for about 13.4 times 2012 expected earnings, CVS could be a good value at these levels. Finding a stock selling for near its growth rate, and a company that can probably raise its dividend by 15-20% per year is not normally something you see. I'm confident enough in CVS' prospects I'm giving CVS an outperform rating on CAPSCall today.
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