Recent Buy -November (Part 1)

On 27th October, I bought 15 stocks of the CVS (CVS) at an average price of $68.64.

Total money invested is $1,029.60.  Dividend yield on this purchase yields 2.91%.

This purchase will yield about $30.0 in annual dividends ($0.50 paid quarterly, typically in January April July and October). Dividends will not be reinvested automatically.

I expect the next dividend increase to be announced in December for upcoming January dividend payment. However, with huge debt and possibility of Aetna’s buyout at very high valuation, almost at much higher valuation than the overall market cap of the absorbing company itself does nothing but only adds to my worry of dividend growth will be much lower than past decade. Looking at the free cash flow from operations alone, it stands at about $ 10 B from CVS and another $ 3 B from Aetna, assuming acquisition goes thru. Debt stands at  $27 B for CVS and another assumed debt will be about $ 10 B from Aetna acquisition if goes thru. I still believe that the dividend will be increased between 8 to 12%.

Forward P/E is about 11 for CVS.

I believe the company is trying to go amazon-proof market of insurance business and can potentially use CVS locations down the line to convert into urgent care centers, should pharmacy business becomes competitive by amazon entry. Another concern is high amount of intangible assets and goodwill on books. For pharmaceutical companies like CVS surely warrants the high intangible assets specially due to licensing in prescribed drug business but by nature I do not like so much high intangible assets in relation with tangible. In short term, goodwill will only increase if AET buyout gets thru.

I believe there will be more opportunities to buy CVS in future, unless of course, amazon comes out tomorrow and announce that they will not be looking into pharmacy business or aetna offer falls apart then CVS will rally. But then again, we can’t invest on speculation either, specially uncertainty of bidding war for acquisition for Aenta if it gets to that point. I think in next 3 to 6 months there will be lot of clarity in both, the coarse CVS takes and the overall market sentiments. Current ratio of CVS is also barely 1.10, I’d like to see higher than that to have some cushion in higher interest market that may be coming up. That is the reason behind lower amount of buy to begin with.

What are your thoughts on this purchase ? What are the stocks you are buying or looking to add ?

This Post Has 2 Comments

  1. Nice buy, there is correction in price due to Amazon news. For Amazon it is difficult space to compete, because of urgency to get your prescription. I also initiate position last week.

    1. Thank you Jigar for your comment. I generally agree that its a touch space for amazon mainly due to licensing requirement. I also agree the urgency need, however, I believe Amazon already offers 2 hours free shipping for prime members and 1 hour delivery for $7.99. Also, there could always be a possibility of teaming up with Uber/Lyft for delivery of prescribed drugs.

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