The board of CVS Health Corporation (NYSE:CVS) has announced that it will be increasing its dividend by 10.0% on the 1st of February to $0.605, up from last year’s comparable payment of $0.55. This will take the dividend yield to an attractive 2.3%, providing a nice boost to shareholder returns.
CVS Health’s Payment Has Solid Earnings Coverage
We like to see robust dividend yields, but that doesn’t matter if the payment isn’t sustainable. Prior to this announcement, CVS Health’s dividend made up quite a large proportion of earnings but only 15% of free cash flows. This leaves plenty of cash for reinvestment into the business.
Looking forward, earnings per share is forecast to rise exponentially over the next year. Assuming the dividend continues along recent trends, we estimate that the payout ratio could reach 27%, which is in a comfortable range for us.
CVS Health Has A Solid Track Record
The company has a sustained record of paying dividends with very little fluctuation. The annual payment during the last 10 years was $0.65 in 2012, and the most recent fiscal year payment was $2.20. This means that it has been growing its distributions at 13% per annum over that time. We can see that payments have shown some very nice upward momentum without faltering, which provides some reassurance that future payments will also be reliable.
The Dividend Has Limited Growth Potential
The company’s investors will be pleased to have been receiving dividend income for some time. However, initial appearances might be deceiving. CVS Health’s earnings per share has shrunk at 13% a year over the past five years. Dividend payments are likely to come under some pressure unless EPS can pull out of the nosedive it is in. Over the next year, however, earnings are actually predicted to rise, but we would still be cautious until a track record of earnings growth can be built.
Our Thoughts On CVS Health’s Dividend
Overall, we always like to see the dividend being raised, but we don’t think CVS Health will make a great income stock. The company is generating plenty of cash, but we still think the dividend is a bit high for comfort. We don’t think CVS Health is a great stock to add to your portfolio if income is your focus.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. As an example, we’ve identified 3 warning signs for CVS Health that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.
What are the risks and opportunities for CVS Health?
Trading at 46.8% below our estimate of its fair value
Earnings are forecast to grow 22.29% per year
Profit margins (1%) are lower than last year (2.7%)
Large one-off items impacting financial results
Has a high level of debt
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.