CVS Health (NYSE:CVS) was substantially undervalued before the 7% pop on Wednesday. It remains a strong buy for long-term investors.
Why the Pop?
CVS reported its Q2 results on Wednesday. And the stock appreciated 7% because the business performed better than expected with the company beating its own Q2 adjusted earnings per share (“EPS”) guidance by 10%. As a result, it also boosted its full-year guidance modestly by about 1.8% to $6.89-7.00.
Additionally, the Aetna integration and debt reduction have been progressing well.
Adjusted revenues increased 36% to $63.4 billion, adjusted operating income rising 55% to $4 billion, adjusted EPS rising 12% to $1.89, and cash flow from operations climbing 82% to $5.3 billion. The large spike in revenues and operating income is attributable to the Aetna acquisition, which was closed on November 28, 2018.
The Leveraged Balance Sheet
The Aetna acquisition resulted in CVS’s leveraged balance sheet. At the end of Q2, CVS’s net debt arrived at $61.3 billion, leading to a D/E of 99.6% and a debt-to-assets ratio of 28%.
Thankfully, CVS generates strong cash flow and is focused on debt reduction. In Q2, it generated $5.3 billion in cash from operations and since completing the Aetna acquisition, it has repaid ~$6.6 billion of debt.
The Dividend Freeze Isn’t Permanent
The company won’t increase its dividend nor buy back any shares until it arrives at a leverage ratio (debt to EBITDA) of low 3x, which is expected to be achieved by 2022.
Unfortunately, we have maxed the word limit for this excerpt. But you can read the full Seeking Alpha article (with images and graphs) here: CVS Health: Dividend Stock Still A Strong Buy After The 7% Pop
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Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.
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