It’s only been a few weeks since CVS Health (NYSE:CVS) stock gave its investors some relief, with its settling of opioid litigation.
Now the health services giant has made an announcement that could also change the prognosis for CVS stock. I’m talking about its plans to launch a new share repurchase program. Along with an expanding multiple and likely M&A action, CVS stock looks good for the long haul.
Sure, this share repurchase news hasn’t fueled a big rally. However, I would not dismiss it as a non-factor. This return-of-capital effort could in time prove to be a catalyst for the stock.
This share repurchase will help provide a further boost to earnings per share, as the buyback reduces the outstanding share count.
Add in the potential for CVS to experience multiple expansion (as it puts past issues behind it), as well as its dividend, and total returns in the coming years could be more than satisfactory.
| CVS | CVS Health | $99.34 |
CVS Stock and Management’s $10 Billion Buyback Plan
On Nov. 21, CVS Health disclosed that its board of directors approved the company to buy back as much as $10 billion worth of stock, once the existing CVS share repurchase program (approved last year) is fully utilized.
Based on CVS’s current market capitalization ($127.9 billion), $10 billion equates to around 7.8% of outstanding shares. Reducing the share count by this amount will most likely bolster future returns for this stock.
For instance, even if the company’s earnings stay constant, taking 7.8% of its share count out of circulation would increase earnings per share by just under 8.5%.
At the very least, this would likely lead to around an 8.5% increase in the CVS stock price. Already trading at an already low earnings multiple (11.4), shares could easily sustain their current valuation and move higher in tandem with increased EPS.
However, it’s not as if this is the only factor in CVS’s corner right now. Consider it more like the cherry on top. There are also existing factors in play that could cause shares to appreciate in value, at a level outsized compared to that of earnings growth.
How CVS’s Earnings Multiple Could Expand
A valuation of 11.4 times earnings may sound cheap, but the current earnings multiple of CVS stock isn’t out of line compared to peers. Walgreens Boots Alliance (NASDAQ:WBA) sports an even lower forward valuation (9 times earnings).
As you may know, besides its pharmacy business, CVS also owns health insurer Aetna. Similar health insurance companies trade at forward price-to-earnings ratios in the mid-teens range.
With the aforementioned opioid litigation settlement, a major risk is now removed. This may help lessen the stock’s present valuation discount.
Alongside this, as the company continues to make acquisitions of companies in faster-growing segments of the healthcare market, like its pending deal for Signify Health (NYSE:SGFY), overall revenue/earnings growth could accelerate, which in turn would justify multiple expansion.
Bottom Line on CVS Stock
Although fairly resilient during this down year for the stock market, issues like opioid crisis lawsuits, and slowing growth, have held shares down.
However, this stock’s performance in 2023 and 2024 could be far more stellar than its performance in 2022. Opioid crisis litigation is now in the rearview mirror, and EPS growth is on the horizon.
Don’t forget too that CVS’s dividend could give yet another lift to total returns. This stock currently has a forward dividend yield of 2.25%, but with increased earnings, and an increased share count, there may be plenty more room for management to increase this payout.
With this share repurchase announcement, there’s now more reason to hold onto an existing CVS stock position if you already own it, and more reason to buy it if it’s not currently in your portfolio.
CVS stock earns a “B” rating in Portfolio Grader.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.