Dear Mr. Berko: I can’t make up my mind whether to buy 500 shares of CVS or 500 shares of Walgreens.
— PW, Wilmington, N.C.
Dear PW: CVS, which stands for Consumer Value Stores, began life in 1963 as a health and beauty aids chain with $863,000 in revenues. Based in Woonsocket, R.I., CVS Health (CVS-$67) completed its $69 billion acquisition of Aetna in November. Aetna was the third-largest health care benefits company in the U.S., with $60 billion in revenues. And after all the elves, pixies and gnomes are found hiding in their respective coves and corners, the $69 billion purchase price could run a few billion dollars higher. Aetna was among the nation’s leading health care benefits companies, serving 47 million Americans. It directed their activities to promote better-informed outcomes (medical, pharmaceutical, dental and disability plans, etc.) while increasing our health care costs significantly each year.
CVS management and analysts believe that this outside-the-box move will change the character of CVS — that combining the nation’s leading pharmaceutical retailer with the nation’s third-largest health insurer will cause hosts of closefisted, cheeseparing, mingy decisions and confusion regarding CVS’ important Medicare Part D business. Some of the concessions ordered by a court in the District of Columbia may initially flatten CVS’ earnings. The resulting hiccups will be heard by an estimated 12 percent of the workforce who will be laid off.
The combination of Aetna (50,000 employees) and CVS (203,000 employees) creates a health care giant with more than $250 billion in revenues, and in the coming dozen months, a lot of previously sacrosanct turf will disappear. A longterm investment (three to five years) might be worthwhile; it depends on how smoothly the Aetna and CVS people integrate their boundaries and responsibilities. Certainly, the deal faces a series of protractive burps and belches, with unnecessary management friction causing implementation delays. Observers think CVS’ revenue momentum will slow in the next few years, and so will earnings growth. Management will spend too much time managing the progress of the merger, to the detriment of the revenue and earnings progress of CVS. Although, the board is using some of its substantial cash flow (estimated $10.60 a share this year) to increase the dividend to $2.40 this year from the $2 paid in 2017 and 2018. And $2.40 could become $2.60 next year and then $2.90 in 2021, which would be a fair dinkum dividend. At today’s market price of $67, that would be a 3.1 percent yield — better than, though certainly riskier than, a three-month certificate of deposit! CVS’ stock is down nearly 50 percent from its $113 high in the summer of 2016, and Morningstar, Credit Suisse, Ned Davis Research, UBS, Argus Research, Bank of America, CFRA, Thomson Reuters and Value Line are recommending its purchase.
