This article was co-produced with Chuck Walston.

Despite considering myself a long-term investor, I unceremoniously dumped CVS Health Corporation (NYSE:CVS) stock when the company halted its dividend. I was fully aware of the reasoning behind management’s decision, but it still felt like a harsh blow.

Back in 2017, CVS made a seismic move by acquiring Aetna, a health insurance company, for $77 billion, including debt assumption. This acquisition caused CVS’s leverage ratios to spike, ultimately leading to a prudent decision to freeze the dividend.

The merger with Aetna was a crucial step in the company’s transition from a simple pharmacy to a customer-centric health company.

With the acquisitions of pharmacy benefit manager Caremark in 2007, Aetna in 2018, and last year’s deal to acquire healthcare service providers Signify and Oak Street, CVS’s management has successfully repositioned the company as a preeminent leader in the healthcare services industry.

However, despite this remarkable transformation, shares of CVS have experienced a turbulent ride, plummeting by 13% over the last twelve months. A dip in COVID-19 vaccination rates, in addition to a recent revision of its full-year EPS guidance, have been among the headwinds battering the stock.

Nevertheless, the results from the last quarter and management’s guidance indicate that CVS is poised for reasonable growth in the foreseeable future.

Adding to the optimism is the resumption of dividend growth, substantial share buybacks, and an appealing valuation, which collectively present CVS as a compelling investment opportunity.

A View Of Recent Results

CVS released its Q3 2023 results on the first of November, delivering a double beat for investors. The non-GAAP EPS stood at $2.21, up from $2.17 in the comparable quarter, and surpassed consensus by $0.08.

Revenue surged to $89.8 billion, a 10.6% year-over-year increase, surpassing analysts’ estimates by $1.63 billion.

Adjusted operating income witnessed a 10.8% rise to $1.88 billion, and health services revenue saw an 8.4% increase to $46.9 million.

Although revenue in the healthcare benefits business soared by 16.9% to $26.3 billion, there was a 6.4% fall in adjusted operating income for that segment, amounting to $1.54 billion.

The pharmacy and consumer wellness segment recorded a 6% revenue growth to $28.87 billion, but also saw a slight decline in adjusted operating income to $1.39 billion.

Management revised the guidance for FY 2023, with a forecast for GAAP earnings expected to range between $6.37 and $6.61, down from the previous range of $6.53 to $6.75. However, the company reiterated the previous guidance for adjusted earnings per share in the range of $8.50 to $8.70, and for cash flow from operations of $12.5 billion to $13.5 billion.

Management also anticipates cash flow to be toward the upper end of the guidance range, pointing to costs related to recent acquisitions for the reduced guidance.

Recent Developments

Early last month, CVS introduced CostVantage, a more straightforward, cost-based drug pricing program. Expected to be implemented this year, CostVantage aims to revamp how the company prices prescriptions, providing enhanced transparency while, at times, lowering drug prices.

The cost of medications is typically determined by pharmacy benefit managers (PBMs), who negotiate discounts between drug manufacturers and insurers. However, with the CostVantage Plan, customers will pay the drug manufacturer’s list price plus a markup and dispensing fee.

CostVantage will also furnish customers with information regarding prescription drug costs and their insurer’s portion of the total cost.

In 2023, CVS sealed multibillion-dollar deals to acquire home health services providers Signify and Oak Street Health, entities focusing on primary care for seniors.

The $8 billion deal brings Signify’s network of over 10,000 clinicians across the U.S. to CVS. On average, these clinicians spend 2.5 times more time with patients during home visits than a typical visit with a primary care provider.

Signify estimated it conducted nearly 2.5 million patient contacts through in-person and virtual visits in 2022, with management anticipating over $500 million in synergies to be realized from the merger.

The deal for Oak Street Health, costing about $9.5 billion plus the assumption of Oak Street’s debt, was CVS’ third-largest acquisition in the last decade. Oak Street operates over 160 primary care centers offering routine health screenings and diagnoses for older adults.

However, while CVS is expanding its home health services business, it is retracting its physical presence. Recently, a company spokesperson revealed a plan to close some pharmacies operating in Target Corporation (TGT) stores.

CVS operates pharmacies in roughly 1,800 of Target’s 1,956 stores in the U.S. Although the number of stores to be closed was undisclosed, a Wall Street Journal piece claimed the company plans to shut “dozens” of locations.

Back in 2021, management disclosed a plan to close approximately 900 locations, around 10% of its stores, between 2022 and 2024. As of now, CVS has closed about 600 stores, with the remaining 300 expected to shut down this year. The closures at Target will commence in February and conclude by the end of April.

Last fall, CVS announced its collaboration with drug manufacturers to commercialize and co-produce biosimilars.