CVS Caremark (CVS) grabbed headlines when it eliminated cigarettes from all its stores. And now it’s continuing to grow its healthy lifestyle brand by featuring fresh fruit and other healthy snacks. But what’s really fueling CVS’s growth is its acquisitions.
In May CVS acquired Omnicare, a pharmacy benefit manager for seniors, and in June CVS acquired Target’s pharmacy business of 1600 drugstores. Both these deals will boost future profits, which have increased every year since 2002.
Ten Year Chart
The ten-year chart looks nice, but the negative is the stock’s gone on a faster run higher in recent years, and that’s taken the P/E ratio up to a point where the stock is a bit overvalued.
CVS has grown profits 14% a year the last decade, and analysts predict profit growth of 15% for the next 3-to-5 years. The company also pays a dividend of more than 1%. So total annual returns could amount to 16% per year.
Profit History
The bad news is CVS’s P/E is 21. During the past decade the median P/E has been between 13 and 19 each year. So the stock is a little high, but not by much. 16% total return is worth 20 times earnings when its a safe consistent grower like CVS is. So the $108 stock is worth $103 in my eyes.
Sharek’s Take
CVS Caremark is the type of stock conservative investors can buy-and-hold. The company has increased profits each year for more than a decade and management pays investors a dividend of more than 1% per year while also acquiring other companies to boost long-term growth. My only issue is the P/E is high by historical standards and new investors would be better off buying in under $100 per share.
View the One Year Chart here. View the Earnings Table here.
