Shares of CVS Health (CVS) have been struggling this month after reporting disappointing quarterly results and lowering its guidance for the year. Investors are worried about the company’s higher costs and challenges due to economic conditions, including its dividend yield of 4.8% per year.
To determine if CVS can sustain its dividend, investors look at the payout ratio, which compares annual dividends per share to annual earnings per share. CVS has historically maintained a payout ratio of just over 50% in the past three years. Despite a 20% cut in earnings guidance this year, CVS still expects to pay out 47% of its forecasted EPS in dividends, leaving room for flexibility.
While the current dividend seems secure, there are concerns about CVS’s long-term sustainability. The company’s pursuit of acquisitions and potential future challenges with rising medical costs could impact its ability to maintain its dividend. Monitoring CVS’s free cash flow is crucial to assess its capacity for growth and dividend payments in the future.
Despite uncertainties, CVS Health stock is attractively priced at 10 times trailing earnings, making it a potential value buy for long-term investors. However, keeping an eye on free cash flow and the company’s financial health is essential to gauge its ability to sustain its dividend and pursue growth opportunities. If CVS can maintain strong free cash flow, it could be a promising investment option for those willing to take on some risk.