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%.
There are so many investing mistakes an investor can make. So, it’s helpful to see the mistakes others have made and learn a lesson or a few.
One investing mistake I’ve made time and time again was booking profits on solid stocks. Some investors believe it’s not wrong as long as you make money. I agree there’s some truth in that but not the whole truth. (I’ll elaborate at the end of the article.)
There was a number of reasons why I booked profits, and I’ll illustrate with the examples below why I was wrong.
The Stock Got Too Expensive?!
I sold out of Royal Bank of Canada (TSX:RY)(NYSE:RY) in August 2016. At the time, I thought the top Canadian bank was close to fully valued and I expected to be able to buy the stock back at a lower price.
From my selling point, the stock went on to deliver total returns of about 12%. What’s more? Fast forward three years, RY stock looks fairly valued to me right now trading at about 11.6 times earnings at about CAD$102 per share.
Lesson Learned: In your lifetime of holding quality stocks, for sure there must be times in which they become undervalued, fairly valued, or overvalued. If your goal is to build a solid portfolio and use stocks, such as Royal Bank, as stable foundation stocks, you should aim to buy when they’re fairly to undervalued and hold for a long time.
To create a passive income portfolio, you can invest in bonds or stocks that generate interest or dividend income without you having to lift a finger. I prefer to invest in stocks which have outperformed bonds in the long run.
I also like the concept of investing in stocks because I’m owning stakes in businesses and benefiting from their profits (although I also take on their risks). This is markedly different from purchasing bonds for which you’re lending your money to governments or corporations for interests in return.
In fact, dividend investing is my favorite way to generate passive income. There are so many safe dividend stocks to choose from. Even in a booming stock market like today, you can still find quality businesses at good valuations.
Here’s how to create a passive dividend income portfolio:
Buy stocks that offer safe dividends at good valuations
Diversify but don’t di-worsify
Aim for a low-maintenance portfolio that’s replicable, scalable, and can be largely automated
Buy stocks that offer safe dividends
The U.S. and Canadian stock markets offer yields of 1.8% and 2.8%, respectively. There are plenty of safe dividend stocks that offer higher yields of about 3-6%.
However, typically, the higher the yield of a stock, the slower its dividend growth will be. (Sometimes, high yielders don’t increase their dividends.) Similarly, low yield stocks tend to increase their dividends faster. Typically, dividend growth stocks are safer and better than stocks that simply maintain their dividends.
Buy stocks at good valuations to protect your invested capital and maximize your gains.
Here are a few examples.
A high yield example
NorthWest Healthcare Properties REIT (TSX:NWH.UN) owns a high quality portfolio of medical office buildings and hospital properties in major markets in Canada, Brazil, Germany, The Netherlands, Australia, and New Zealand.
The healthcare REIT generates stable cash flows from having a high occupancy of about 96% and a weighted average lease expiry of 13 years. Additionally, it gets organic growth from having more than 70% of its net operating income indexed to inflation. It also has CAD$370 million projects in its development pipeline that’ll also add to growth.