Shares of CVS Health (NYSE:CVS) are down 27.1% from their 52-week high and down 21.7% year-to-date. The stock’s decline was compounded by a catastrophic 17% sell-off, CVS’s largest one-day decline in over a decade, after the company missed first-quarter earnings estimates and reduced its guidance. However, I believe the sell-off has created a buying opportunity for patient, long-term investors, as shares are starting to look like a bargain.
I’m bullish on CVS based on its attractive valuation and well-above-average dividend yield. Plus, while it isn’t exactly known as a growth stock, it is profitable, and earnings are expected to grow over the next several years, so it’s not as if this is a melting ice cube. Lastly, the $75 billion stock is highly rated by both sell-side analysts and TipRanks’ quantitative Smart Score.
Challenges Exist
Let’s get this out of the way: the stock certainly has its challenges. The earnings miss that led to the dramatic one-day sell-off was caused in large part by surging Medicare Advantage costs. The medical costs for its Aetna health insurance business were a whopping $900 million higher than anticipated.
This resulted from a combination of more senior citizens utilizing medical services at a time when the government was clamping down on costs, a trend that has hurt the whole healthcare space, not just CVS.
While this issue won’t go away overnight, CVS should be able to improve from here. Management says it will prioritize margins over memberships in 2025, and the company can also raise prices and adjust benefits to attempt to mitigate these issues in the future.
The firm’s CFO, Thomas Cowhey, believes that Medicare Advantage can still be a good business for CVS but admitted that it will take a “couple of years to get it back on track” and that the company will “start that process with our 2025 bids that go in just a few weeks.”
Furthermore, CVS is a diversified healthcare ecosystem with other businesses outside of Medicare Advantage. These include its retail pharmacy locations, biosimilar drug subsidiary Cordavis, primary care provider Oak Street Health, and home healthcare service provider Signify Health, which can help offset weakness in the Medicare Advantage business while management works to get it back on track.
While the issues are significant, they appear to be accounted for in the stock’s valuation, and the sell-off looks overdone.
CVS Stock Has an Inexpensive Valuation
Following the plunge, shares of CVS look compelling from a valuation standpoint. Shares trade at a mere 8.6 times consensus 2024 earnings estimates and an even cheaper 7.5 times 2025 earnings estimates. To provide some context as to just how cheap this is, the S&P 500 (SPX) currently trades at 23.1 times earnings, so CVS essentially trades at one-third the valuation of the broader market.
While the company has challenges to contend with, this just seems too cheap for a profitable, time-tested business like CVS.
Growth Ahead
The stock is cheap, but it’s not a shrinking business. In fact, CVS is projected to grow earnings at an attractive clip over the next several years. The company earned $6.49 per share in 2023. Even with the lowered guidance, analysts expect it to earn $7.03 per share in 2024. Earnings growth is expected to accelerate, with consensus projections calling for $8.01 per share in 2025 and $8.78 per share in 2026.
Even if the stock continued to trade at its current multiple of 8.6 times earnings, if it were to hit these targets, shares would be worth $75.50 in 2026, an increase of over 24% from today’s share price of just below $60.
This doesn’t even take into account the fact that the stock could enjoy some valuation multiple expansion based on this earnings growth. Let’s say the multiple increased slightly to 10 times earnings. Then, shares would be worth $87.80 in 2026, more than 44% higher than today’s share price.
To be clear, this is theoretical, and CVS will have to actually hit these targets. But as you can see, CVS is projected to grow earnings, and the stock has plenty of potential for upside if it achieves these targets. Plus, the current valuation should give investors some margin of safety.
Compelling Dividend Yield
In addition to this bargain-bin valuation, another result of the recent sell-off is that CVS also sports an attractive 4.4% dividend yield. This yield easily beats the paltry 1.4% yield offered by the S&P 500 and even pips the 4.28% that 10-year treasuries currently yield. CVS appears committed to the dividend, as it has paid dividends for 26 consecutive years, and management has spoken of its importance to shareholders.
Is CVS Stock a Buy, According to Analysts?
Turning to Wall Street, CVS earns a Moderate Buy consensus rating based on 11 Buys, nine Holds, and zero Sell ratings assigned in the past three months. The average CVS stock price target of $68.53 implies 12.9% upside potential.
Outperform Smart Score Rating
In addition to this favorable view from analysts, CVS is also rated highly by TipRanks’ Smart Score system. The Smart Score is a proprietary quantitative stock scoring system created by TipRanks. It gives stocks a score from 1 to 10 based on eight market key factors. A score of 8 or above is equivalent to an Outperform rating, so CVS’s Smart Score of 9 is compelling.
Investor Takeaway
CVS certainly isn’t the most exciting stock in the market. But an investment doesn’t always have to be exciting to be profitable.
I’m bullish on CVS because it’s profitable, analysts expect it to grow earnings over the next few years, and it trades for a bargain-bin valuation of just 8.6 times earnings. Plus, it offers an attractive dividend yield of 4.4%. The valuation offers a margin of safety for investors, and they can enjoy collecting the dividend while they wait for the company to sort through its issues.
