CVS Offers a Superb Bet on the Drug and Health Care Spending Boom
We have reached the midpoint of 2016, and even though the markets got slammed by the Brexit results a few days ago, they are still in positive territory for the year, with the S&P 500 up 2.9% year to date.
Although there may be some hair-raising ups and downs along the way, the stock market remains the best choice for long-term investing, if investors bet on steady returns.
The aging of the U.S. population guarantees that there will be good investments to be found in the health care sector, if investors know where to look. CVS Health (CVS) - Get Report is a proven winner in this field that has recently taken steps to strengthen an already strong position.
With the market for both prescription and over-the-counter drugs large and lucrative, competition in this industry has gotten tougher. Walgreens Boots Alliance's agreement last year to purchase Rite Aid was a warning shot in that battle.
But CVS has made some smart moves that show the company's ability to adapt to changes in the marketplace. The most significant was its acquisition of Omnicare, the country's leading provider of pharmacy services in nursing homes, another fast-growing market.
Omnicare specializes in the drugs and related services used by older patients with chronic conditions. Its relations with leading health insurers were another factor supporting the deal.
CVS also acquired the pharmacy locations inside Target stores for $1.9 billion last year, giving the drug chain a highly visible presence in one of the nation's biggest retail outlets.
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Evidence that these acquisitions are already paying off can be found in CVS' first-quarter earnings report.
Adjusted earnings per share came in $1.18, beating Wall Street's predictions. The money brought in by the Omnicare subsidiary helped overall CVS revenue jump 19% to $43.2 billion.
Same-store sales increased 4.2%, while pharmacy network claims in CVS' drug benefit business increased 23% to 283 million claims, mostly due to new business. Excluding onetime costs associated with the Omnicare acquisition, the retail division's operating profit grew $111 million, or 6.4% from $1.727 billion, year over year.
"We posted solid results this quarter and are off to a strong start in 2016. Operating profit in the retail business was in line with our expectations while operating profit in pharmacy benefits management exceeded our expectations, driven by strong prescription volumes," said Chief Executive Larry J. Merlo.
The company also generated $1.8 billion of free cash during the quarter and continued to return value to shareholders, through investments in the business as well as dividends and share repurchases. The dividend yield is 1.79%, and the price-earnings ratio is a reasonable 20.
CVS clearly has the right strategy for success in the evolving health care marketplace.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.