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CVS Expects Double-Digit Dividend Growth over the Next Four Years

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Returning value to shareholders

CVS Health (CVS) expects to pay out $1.40 per share by way of dividends in 2015. The company has had a strong history of returning value to shareholders through dividends and share repurchases. In 1Q15, CVS repurchased shares worth about $2 billion and paid dividends of $399 million.

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Dividend payout ratio

CVS’s dividend payout ratio of 27.6% over the last 12 months compares to almost 47% for the S&P 500 Index (SPY) and 44.7% for the S&P 500 Food and Staples Retailing Index (XLP) (FXG). Rival Walgreens Boots Alliance (WBA) has paid out ~63.2% of its earnings by way of dividends in the last 12 months. Rite Aid (RAD), which is in the midst of a strategy reset, and Diplomat Pharmacy (DPLO) haven’t paid dividends.

CVS’s relatively lower ratio is due to the somewhat higher growth opportunities the company is eyeing. The company has featured inorganic growth as a key element of its strategy. At the same time, its strong cash generating prowess shows that it’s capable of raising dividends periodically.

Future shareholder payouts

But dividends are increasing at a rapid pace. They’ve increased at a CAGR (compound annual growth rate) of 29.3% over the last five years. The company is targeting a payout ratio of ~35% by 2018. Dividend per share would come in at ~$2.13 in 2018, according to the company’s guidance CAGR of 18% from 2014–2018.

Share repurchases

CVS Health also expects to repurchase shares worth $4–$5 billion each year through 2018. However, as a result of the Target pharmacies purchase, which CVS is planning to finance through debt, CVS is cutting its share repurchase program by $1 billion this year to $5 billion. The lower share repurchases are also expected to lower adjusted earnings per share (or EPS) by $0.01 in 2015, $0.04 in 2016, and $0.05 in 2017.

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