CVS Caremark: Restructuring Debt, Mulling Dividend Increase

NEW YORK ( TheStreet) -- As headlines moan and groan about the controversial "fiscal cliff" publicly traded companies are buying back old debt and borrowing money at very low interest rates.

Before I discuss one of them, let me share with you a controversial article titled "Why the Fiscal Cliff Will Happen...for About a Week" written by my friend and respected investment analyst Alexander Green.

The reason I bring this article to your attention is summarized in the following quote: "Progress on this front (tax and budget reform) -- which we are likely to see next year -- will be good for the dollar, good for the stock market, and good for the future of the United States. Govern your portfolio accordingly."

That's why investors will want to consider CVS CVS Caremark ( CVS) before the stock market begins its "Santa Claus Rally."

As I mentioned elsewhere, the abundance of very low interest rate credit is helping to fuel some "stock surprises" and some end-of-year acquisitions.

This may fuel a seasonal rally along with good news that may be coming out of Washington and the Federal Reserve's meeting this week. The Fed's Open Market Committee's quarterly meeting results and a special press conference by Fed Chairman Bernanke happens Wednesday at 12:15 p.m. EST.

CVS is currently Jim Cramer's favorite name among the pharmacy services companies. It's increasing its quarterly revenue (most recent quarter up 13.3%) and quarterly earnings (up 16% year-over-year). CVS does have an enormous amount of total debt -- over $10 bill (MRQ).

Yet, in the current financial environment with interest rates near zero, CVS can restructure that debt so it is "lighter" and more manageable. That's exactly what management is doing. In a press release Monday, CVS announced the early results of a tender offer that in essence replaces higher interest rate debt with lower rates. It's a "refinance" of sorts.

The press release states, "In addition, CVS Caremark has amended the terms of the tender offers to increase the Maximum Tender Offer Amount such that the maximum aggregate principal amount of the maximum tender offer notes tendered and accepted for purchase will be equal to $1,325,000,000 less the aggregate principal amount of the any and all notes tendered and accepted for purchase.

"Other than the increase to the maximum tender offer amount, all other terms and conditions of the tender offers, as previously announced, remain unchanged. Dave Denton, executive vice president and chief financial officer stated: "Through this transaction as well as our recent debt issuance, we are taking advantage of the current favorable interest rate environment. This debt refinancing will enhance our long-term debt structure and decrease our interest expense going forward."

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There's more good news for shareholders, but first let's look at a one-year chart of the share price of CVS as well as its PE value, which has risen in tandem with the price-per-share. CVS Chart CVS data by YCharts

The valuation of CVS stock looks attractive with a forward (one-year) PE of around 12 and an attractive price-to-earnings-growth (PEG) ratio (five-year expected) of only 1.04. The dividend seems paltry to me at only a yield-to-price of 1.38%, but that's where this story and this stock becomes more interesting.

Argus Research recently reported its opinion that CVS may be prepared to raise the dividend by up to 15% at the upcoming analyst meeting Thursday. Argus apparently believes the outcome of the meeting may move CVS's stock price. Argus and Cantor Fitzgerald maintain a "buy" rating on CVS.

Will CVS raise itsdividend Thursday at the analyst meeting? I think there's every reason to believe that it will -- if it doesn't, shares may plummet in disappointment. If you're interested in taking a position, you may want to nail down a few shares before the meeting and the rest afterwards.

Nineteen analysts have a consensus earnings estimate on this quarter (ending this month) of $1.10 per share, which would be a 23.6% increase over the year-ago quarter. The consensus estimate on revenue for this quarter is over $31 billion.

Expectations for CVS are reasonable, management appears to be prudent and proactive and the twin investment themes of ongoing bottom line growth and improving debt maintenance bode well. Do your own careful due diligence before investing, and watch your trailing stops if you own the stock.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Jim Cramer and Stephanie Link actively manage a real money portfolio for his charitable trust- enjoy advance notice of every trade, full access to the portfolio, and deep coverage of the latest economic events and market movements.