On Jan. 30, Walgreens Boots Alliance, a leading pharmacy chain, announced that it was suspending its dividend program, which had been active for over 90 years. This longtime dividend payer is suffering under the weight of financial troubles and had previously resorted to decreasing its payouts.
Walgreens isn’t the only dividend-paying pharmacy chain whose financial results haven’t been strong recently. CVS Health (NYSE: CVS) is in the same boat. Should investors be worried about CVS also decreasing or ending its dividend?
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Walgreens has faced stiff competition in the past few years. Several companies, including Amazon, are offering what some consumers think is a better way to buy prescription medicines. This challenge has affected foot traffic in Walgreens stores and its revenue and earnings.
CVS Health’s biggest issue has been with its Medicare Advantage (MA) segment. The company hasn’t been able to contain costs in this unit, leading to lower margins and earnings than expected. Things have been so unpredictable and volatile for the company that it has had to modify its guidance downward multiple times, something the market does not like.
Revenue from its COVID-related products has also generally declined in recent years. What’s more, the pharmacy giant isn’t immune to competition: Amazon Pharmacy is expanding. That’s something CVS will have to contend with now.
So, can it avoid having to suspend its dividend? On the positive side, CVS is a more diversified healthcare company than Walgreens. CVS isn’t just a leading pharmacy chain (which, like Walgreens, also sells some groceries and other items). It is also one of the largest health insurers in the U.S. through its Aetna subsidiary.
In recent years, the company has made a stronger push into primary care. It started a subsidiary called Cordavis to develop and market biosimilar drugs. The business’ diversified operations and entrenched position throughout many communities are major strengths. Though its bottom line has been moving in the wrong direction, largely due to its MA business, its revenue keeps moving in the right direction.
CVS revenue (quarterly), data by YCharts; EPS = earnings per share.
It’s also worth pointing out that CVS Health seems to have plenty of space to increase its dividend. The company’s cash payout ratio is a very modest 30%. If it were twice that level, it would still be considered reasonable. At first glance, then, it doesn’t look like it needs to decrease or suspend its dividend.
There is more to the story, though. CVS currently faces significant uncertainty, given the issues within its MA business and increasing competitive pressures, among other factors. What moves will the company make to right the ship?
It is under new management. The new CEO, David Joyner, took the helm in October. The leadership change adds even more uncertainty to the equation. Even if the company could afford its current dividend, the new CEO might decide it’s more important to reinvest that money into efforts to improve its financial performance.
If that does happen, the stock will likely fall off a cliff, but maximizing shareholder value in the long run sometimes means making decisions that harm the stock price in the short run. No one knows whether that’s the route the new CEO will take, but before buying the stock for its dividend, investors should consider all these moving parts.
And here is something else to remember. Many rock-solid dividend stocks on the market are currently delivering strong financial results and face far less uncertainty. The list of Dividend Kings is a particularly good place to start looking for such companies. CVS’ dividend isn’t as safe as it comes on Wall Street despite its juicy 4.7% forward yield.
The company might not resort to payout cuts, but investors wouldn’t have to wonder about that at all with many other corporations. That’s why I would advise income seekers to look elsewhere until CVS Health improves its business.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Prosper Junior Bakiny has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.
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