CVS Health (NYSE:CVS) has just declared its dividend. It is now yielding almost 2.6%. In this article we will discuss why the name is a dividend growth powerhouse, and whether we will get some capital appreciation out of the name which has been absolutely crushed in the last year. I have had a strong buy call on the name since the $73 mark. It has rebounded about 10% from that level, but has struggled to break into the mid-$80s. Long-term, I like the name as CVS has really grown beyond just filling prescriptions. The name now boasts 1,000 walk-in medical clinics offering check-ups, screenings and immunizations, among other services. Of course CVS Health is a leading pharmacy benefits manager and now has over 70 million members in its pharmacy benefit plan.

My recommendation continues to be buy the name on dips and sell when the stock get ahead of itself. But at all times, we are holding that core position which we are trading around. Why hold? Dividend growth. Take a look at just the last five years alone (figure 1). The name has grown the dividend every year and is now at $0.50 quarterly. After the major selloff into the $70 range, we now see capital appreciation as likely. This is the recipe for long-term success. However, to justify a buy we also need fundamental support. As such let us examine recent performance.

Figure 1. Five Year Share Price and Dividend History of CVS Health

Source: Google Finance

The recently reported earnings give us several signs that the company continues to outperform on many of the key metrics that we must look at in a pharmacy. The report demonstrates continued strength coming out of the company and that it is performing in line with its guidance for growth and is actually surpassing analyst consensus estimates on both the top and bottom lines. Of course, segment specific results suggest competition is weighing, however, we have no reason to suspect dividend growth will not continue at its current pace.

Why do I suspect competition is weighing a bit? Well the retail segment’s sales fell 3.8% year-over-year, $19.3 billion in Q1 2017. There was some weakness was in the same-store sales, which decreased 4.7% year-over-year. Pharmacy same-store sales also decreased 4.7%. Ouch. They were mostly hit by more generics being filled which are lower revenue generating. It is important to note that prescription volume was down 1.4%. On top of this front store same-store sales were down 4.9% year-over-year. Customer traffic softness has been noticed.

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