On October 27 I made CVS Health (CVS) one of my “10 Stocks for a post coronavirus world” on my JubakAssetManagement.com subscription site and declared that it was the only one of the first group of five stocks that I’d buy now–even though the market looked potentially volatile. I cited the stock’s 3.57% dividend as one very supportive factor.
The subsequent few days have lived up to those worries about volatility. The stock opened at $59.12 on October 27 and closed at $58.15 that day. The shares dipped as low as $55.93 at the close on October 29 before beginning a recovery that has taken these back to a close of $59.45 after today’s (November 3) 2.36% gain. In other words the stock is pretty much back where it was on October 27. I’m officially adding it to my Dividend Portfolio today, November 3, at the October 27 price (since that’s when I made the stock a pick.)
But all this excitement in the short run isn’t why I think owning these shares is a good idea now. Shares of CVS, the drugstore, have been hit by a decline in foot traffic during the coronavirus epidemic. And shares of CVS, the owner of the Aetna and SilverScript health insurance companies, have been roiled by uncertainties about what’s going to happen to the Affordable Care Act and government payment rates for drugs. The stock was down 17% in 2020 as of October 26. And trades at a forward price to earnings ratio of just 7.86 times projected earnings. That’s roughly half of the market average. The price to sales ratio is just 0.3. This is one cheap stock: Morningstar calculates that it’s 35% undervalued.
It’s not hard to see that any economic recovery would enable CVS to reap the rewards of the synergies it has created–traffic to its pharmacies and on site clinics, driven by Aetna (a 2018 acquisition) and SilverScript–results in more buying of non-drug items too. All CVS needs is a return of some of that foot traffic. The company has recently tested a program to offer rapid strep throat and flu tests at its 1,100 MinuteClinics and expects to roll out that effort by mid-November. The company was recently designated by the Trump administration to administer a coronavirus vaccine to the general population when the vaccine is available. About a dozen pharmacy chains will partner with the federal government to administer Covid-19 vaccines, the Centers for Disease Control and Prevention has said in an update to states. Most participating pharmacies are expected to start administering vaccines during Phase Two, when more doses become available, but CVS and Walgreens Boots (WBA) are slated to help vaccinate residents of long-term care facilities in Phase One. .
With its 3.57% dividend I figure I’m getting paid to wait for that foot traffic to return.
One last bit of potential volatility–the company reports earnings on November 6.