CVS Caremark: Drugstore dividends
This leading pharmacy company has healthy prospects for dividend growth.
By Chuck Carlson, DRIP Investor
The first quarter of 2013 saw plenty of dividend action from corporate America. According to Standard & Poor's, companies reported 944 dividend increases in the first quarter, paying out an additional $14.5 billion in dividends.
Despite the healthy dividend increases, companies still have plenty of room to increase dividends. According to S&P, the payout ratio -- per-share dividends divided by per-share earnings -- is currently 36%. Said differently, corporations are paying out a little over one-third of their profits in dividends. The historical average is 52%.
Thus, when you look at the relatively low payout ratio, cash-heavy balance sheets sported by many companies, and expectations for higher earnings as the economy strengthens, the positive dividend-growth trends should continue.
One stock that joined the dividend party in the first quarter is CVS Caremark (CVS), the drugstore and pharmacy benefits manager.
The company boosted its dividend 38% to a quarterly rate of $0.225 per share. The current yield is 1.6%. CVS stock has moved higher this year and is trading around its 52-week high.
Still, I see good things for these shares this year and over the long term. Health care-related stocks are seeing good support from investors, and CVS offers an interesting way to play the sector. Per-share profits should advance at least 15% this year.
I expect dividend growth to continue strongly over the next several years. Indeed, despite the recent hefty increase, CVS is paying out only about 23% of its expected 2013 profits of $3.97 per share.
Another reason I think you'll see continued focus on dividend growth is to keep pace with its chief rival, Walgreen (WAG), which also likes to boost its dividend on a regular basis. I'm impressed with CVS's resiliency during the recent market volatility.
Despite the stock's gains, I would feel comfortable buying at current prices and stepping up purchases on dips to the low $50s. And even if you already own a drugstore stock, such as Walgreen, I believe CVS and Walgreen can coexist profitably in the same portfolio.
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The offering could become the second-biggest this year if underwriters exercise an option to buy more shares.
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