CVS has just started a big run that could last many years, even if not many people trusted in the management after the company shares lost 50% from 2015 to July 2019 (with 52$ as bottom price).
However, the new business model is stronger than ever. Adding insurance to their pharmacy business is bringing more and more clients and help CVS add more services.
Shares moved up recently to 75$ recovering most of the loss of the year. However, more growth is still possible, the management is very conservative in its plan. FCF will grow rapidily in the next 5 years, reaching 13B$ by 2022-2023. As CVS is spending less than 3B$ in dividends, a lot of cash will be available to:
- Reduce Debt from 66B in Dec 2018 to less than 35B by end of 2022
- Buyback shares
- increase the dividend from 2021 on
Dividend growth will average 10% in the next 10 years, considering the ability to reduce shares number, reducing costs and more important the ability to gain market share and add services.
By 2025, CVS could be in the position to have reduced number of shares to 1.1B, Revenue could reach 350B$ and Free Cash Flow 13$/per share. Growth and stability could also improve company valuation to 15x Free Cash Flow, bringing share price to 200$.
Moreover, yearly dividend could move easily to 6$ per share.
30+% Return on Investment
As current share price is affected by high level of debt and (previous) uncertainty from the AETNA acquisition, in less than 6 months it will be clear that acquisition is working and is bringing value to shareholders.
Total return on investment could be massive in the next 6 years:
- 125$ from share price revaluation
- 20$ from Dividends in the next 6 years
- 2$ in 2020
- 2$ in 2021
- 2.5$ in 2022
- 3$ in 2023
- 4.5$ in 2024
- 6$ in 2025
- 145$/75$ = 32% yearly return!!
- this without considering Dividend Reinvestment
With 30+% Return in the next 6 years and 9% dividend expected from 2025 on , CVS is the right Prescription to cure many Investors with a long term solution.