Question

What is cvs company dividend policy? Explain with reference

Answer 1

Dividend policy of CVS Company:

The company is considered to be America’s most dominant healthcare players. The company operates the nation’s second largest pharmacy chain with over 9000 retail locations & is the biggest pharmacy considering its prescription revenue.

On integration with Aetna’s health insurance business, the company believes that it can enhance the economies of scale & derive cost synergies that can result in long term sales, earnings & dividend growth. Though the pharmacy services of the company account for majority of sales, 60% of its operating profits come from retail pharmacy, long term care & health care businesses.

The company has paid dividend for 20 years without any interruption & increased its dividend every year. However the acquisition of Aetna has made the company to take so much debt that the management decided to freeze its dividend until it achieved its long term deleveraging targets. Because of this the company’s 14 year dividend growth came to an end in 2018.

The Aetna purchase resulted in a low credit rating for the company. As a result of this the company has to freeze its dividend & suspend its buyback program. The debt is paid by the company out of retained cash flow which can keep the dividend stable instead of growing it maximizes the cash flow available for deleveraging.

Management expects to pay out $2.6 billion in dividends this year, while free cash flow is expected to be about $7.6 billion, leaving around $5 billion for debt reduction. That would be enough to pay off 12.5% of the debt CVS took on to finance the Aetna deal.

After deleveraging efforts are complete, it is believed that CVS can deliver high EPS growth in the coming years. If the future growth happens as expected the company can return to high dividend growth in the coming years.

Because of purchase of Aetna, the company is expected to high refinancing costs in the bear market but this doesn’t the company’s dividend as CVS has a low payout ratio. As the dividend remains frozen for long time period the management is at the aim of protecting the balance sheet.

The company has a very good management team who are shareholder friendly especially with regard to fast dividend growth.

Reference:

https://www.simplysafedividends.com/intelligent-income/posts/184-cvs-health-a-complicated-business-and-frozen-dividend