CVS Health and the Managed Care Strategy

If Joe Biden wins in November, CVS Health (NYSE:CVS) is one of the stocks you want to own. CVS stock should be a long-term holding.

the exterior of a CVS pharmacy store (CVS stock)
Source: Jonathan Weiss / Shutterstock.com

I have long believed no company is better positioned for the transition to managed care than CVS Health. Its drug stores and clinics provide low-cost distribution and its Aetna insurance unit brings it guaranteed cash flow.

But even efforts to eliminate Obamacare shouldn’t kill it. CVS can offer lower-cost primary care for the uninsured, using nurses, physicians’ assistants, and technology. The patent medicines and supplements that are a replacement for primary care with the uninsured are all available at your local CVS.

Despite all this and a 50 cent per share dividend yielding 3.36%, the stock is down 26% over the last two years. Even I have been inconstant in my affection toward CVS stock when my own cash has been on the line.

What’s Not to Love About CVS Stock?

Over the last four years I’ve bought CVS twice, and sold it twice, making a small profit each time. But my decision to re-invest dividends hasn’t worked out. The dividends came when the stock was high, meaning they purchased few additional shares. Those shares were in the red when I sold.

That’s a fuller disclosure than InvestorPlace requires, but it illustrates an important point. CVS should not be a trade. It should be a long-term holding. But the politicization of health care, on all sides, is making it hard to hold.

Under CEO Larry Merlo, CVS has been redesigned around the Affordable Care Act. Its Caremark pharmacy benefit manager assures it the best prices on drugs. Its network of over 9,900 stores gives it wide distribution and customer convenience. It has bought several specialty pharmacies, putting them under its ProCare brand. It has a network of 1,100 MinuteClinics offering front-line care.

The most transformative deal was its 2018 purchase of Aetna for $69 billion. This assured CVS cash flow. For the second quarter of 2020, this meant revenues of over $65 billion, on which it earned nearly $3 billion, $2.64 per share. For the first six months of the year, top-line growth was 5.6%, with profits rising 48%.

No Love From Politics

Yet the stock hasn’t moved. Its valuation on Sept. 21 was still just $74 billion, just over one quarter’s revenues. The reason is politics.

On the one side, Republicans want to kill the Affordable Care Act, which threatens CVS’ cash flow. On the other side, Democrats want Medicare for all, threatening CVS’ cash flow.

Yet these problems have not beset United Healthcare (NYSE:UNH), the insurer it most closely competes with. UNH stock is up 27% over the last year, while CVS is down. The reason is UNH’s margin, 10.7% for the most recent quarter, nearly double that of CVS. Investors are buying UNH over CVS even though CVS’ dividend yield is twice that of UNH, whose $1.25 per share payout currently yields 1.62%.

UNH lacks CVS’ retail network, but it controls the AARP’s highly-profitable Medicare Part D business. UNH has also gotten into managed care in California, after buying a network of clinics there over several years.

The Bottom Line

When given the choice through Healthcare.gov, consumers prefer managed care to standard insurance.

CVS is only part-way through its managed care journey. It can control costs when people are well, for drugs and front-line care. What’s lacking are specialty facilities to give it visibility on costs when people get old or sick.

The test here comes from managing Medicare and Medicaid contracts. The leader in that business is Centene (NYSE:CNC), which is also a big winner in the marketplace created by the Affordable Care Act.

Can CVS get there, and will the markets still exist when it does? Those are the primary risks you face today buying CVS stock.

On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear,  available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn.


Article printed from InvestorPlace Media, https://investorplace.com/2020/09/cvs-stock-the-managed-care-strategy/.

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