At first glance, CVS Health(NYSE: CVS) stock checks the key boxes for both value- and income-focused investors. Beyond the company's attractive dividend yield and seemingly low valuation, CVS recently posted a quarterly earnings beat.
Yet, checking off boxes, as opposed to deep-diving into a company's fundamentals, can lead to hasty investments -- and CVS provides a prime example. The stock is near its lowest level in five years, which may whet the appetite of dip-buyers and bottom-fishers.
Yet, there's more to the story, just as CVS is more than a drugstore chain. The company also derives revenue from a division that offers healthcare benefits -- and recent trends in healthcare weigh heavily on its outlook.
The surface-level allure of CVS stock
There can be knock-on effects when a stock's price tumbles. For one thing, the price-to-earnings (P/E) ratio can reach a comparatively low level irrespective of that company's earnings. In CVS's case, its trailing-12-month P/E ratio of 10 is far below the sector's median of 35. It's also below the company's five-year average of 17.
Another knock-on effect of a falling share price is that it can make the dividend yield rise regardless of how high the dividend is. Granted, CVS has a history of periodically raising its dividend, and its quarterly $0.67-per-share payouts certainly sweeten the deal for its shareholders.
But then, part of the reason CVS can offer an attention-getting 4.4% dividend yield is that its stock declined sharply. Moreover, a decent dividend isn't much of a consolation prize for folks who bought shares a couple of years ago and are now underwater on their investment.
One segment drags down CVS' outlook
Additionally, investors may be drawn to CVS because it reported second-quarter adjusted earnings of $1.83 per share, beating Wall Street's call for $1.73 per share. However, this result is a fall-off compared to earnings of $2.21 per share in the year-earlier quarter. The company blamed this primarily on a "decline in the Health Care Benefits segment's operating results," reflecting, among other factors, "continued utilization pressure." In other words, patients are seeing the doctor more.
CVS repeated this motif later in its Q2 earnings release. Specifically, it reported that operating income in the health care benefits segment declined 39.1% year over year primarily due to, among other factors, "increased utilization." A Barron's article observed that members of CVS Health's "Medicare Advantage plan are seeking more treatment in the aftermath of the Covid-19 pandemic." As a result, CVS has lowered its full-year 2024 per-share adjusted profit guidance from at least $7 to a current range of $6.40 to $6.65.
Naturally, this raises the question of how the company intends to address its Achilles' heel, the health care benefits segment. So far, it appears that CVS President and CEO Karen Lynch is primarily focused on "leadership changes" in this troubled business segment. Lynch will take over from Brian Kane to directly lead health care benefits, and Executive Vice President and Chief Strategy Officer Katerina Guerraz, an Aetna veteran, will serve as chief operating officer of the segment.
The C-suite changes may convey the appearance of decisive action, but this doesn't mean the "utilization" issue will subside anytime soon. Investors will surely want to see what the reshuffled management actually does to manage, or at least cope with, the health care benefits division's financial outlays.
The proof will be in the results, and it will be a while before CVS has another opportunity to release a quarter's worth of data. Until then, investors should tread carefully, take valuation multiples with a grain of salt, and resist the temptation to chase yield while overlooking fundamental faults.
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David Moadel has no position in any of the stocks mentioned. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.
