Some investors rely on dividends to grow their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that CVS Healthcare Company (NYSE: CVS) is set to be ex-dividend in just four days. The ex-dividend date occurs one day before the record date, which is the day on which shareholders must be on the books of the company to receive a dividend. The ex-dividend date is an important date to know, as any purchase of shares made after this date may mean a late settlement which does not appear on the registration date. Therefore, if you buy CVS Health shares on or after July 22, you will not be eligible to receive the dividend, when it is paid on August 2.
The company’s upcoming dividend is US $ 0.50 per share, following the past 12 months when the company has distributed a total of US $ 2.00 per share to shareholders. Looking at the last 12 months of distributions, CVS Health has a sliding return of around 2.4% on its current price of $ 81.72. Dividends are a major contributor to returns on investment for long-term holders, but only if the dividend continues to be paid. So we need to determine if CVS Health can afford its dividend and if the dividend could increase.
See our latest analysis for CVS Health
If a company pays more dividends than it has earned, then the dividend could become unsustainable – which is not an ideal situation. CVS Health paid a comfortable 35% of its profit last year. Yet cash flow is usually more important than earnings in assessing dividend sustainability, so we always need to check whether the company has generated enough cash to pay its dividend. The good thing is that dividends were well covered by free cash flow, with the company paying 20% of its cash flow last year.
It is encouraging to see that the dividend is covered by both earnings and cash flow. This usually suggests that the dividend is sustainable, as long as profits don’t drop sharply.
Click here to view the company’s payout ratio, as well as analysts’ estimates of its future dividends.
Have profits and dividends increased?
Companies with consistently rising earnings per share usually make the best dividend-paying stocks because they generally find it easier to raise dividends per share. If profits fall and the company is forced to cut its dividend, investors could see the value of their investment go up in smoke. That’s why it’s a relief to see CVS Health’s earnings per share increase by 4.0% per year over the past five years. Recent earnings growth has been limited. However, companies that see their growth slowing can often choose to pay a higher percentage of their profits to shareholders, which could see the dividend continue to rise.
Many investors will assess a company’s dividend yield by evaluating how much dividend payments have changed over time. CVS Health has generated an average annual increase of 19% per year in its dividend, based on dividend payments over the past 10 years. It is encouraging to see the company raising its dividends as profits rise, suggesting at least some corporate interest in rewarding shareholders.
The bottom line
Is CVS Health an attractive dividend-paying stock, or rather left on the shelf? Earnings per share rose moderately, and CVS Health is paying less than half of its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. We’d rather see earnings grow faster, but the best long-term dividend-paying stocks typically combine significant earnings-per-share growth with a low payout ratio, and CVS Health is halfway there. There is a lot to love about CVS Health, and we would prioritize taking a closer look.
With this in mind, an essential part of in-depth stock research is being aware of the risks stocks currently face. For example – CVS Health has 1 warning sign we think you should be aware.
If you are in the dividend-paying stock market, we recommend that you check out our list of the highest dividend-paying stocks with a yield above 2% and a future dividend.
When trading CVS Health or any other investment, use the platform seen by many as the professionals’ gateway to the global market, Interactive brokers. You get the cheapest * trading on stocks, options, futures, forex, bonds and funds from around the world from a single integrated account.
This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
*Interactive Brokers Ranked Least Expensive Broker By StockBrokers.com Online Annual Review 2020
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.