Dividend Increase | CVS Health Corporation (CVS)

Dividend | Dividend Growth | Financial Independence | Freedom | Passive Income
Getting a pay raise while sitting on the couch?  Sign me up!  Thanks CVS for another dividend increase!

There's an old Chinese proverb that says "the best time to plant a tree was 20 years ago, the next best time is now".  The reason for this is that it takes time for a tree to grow and prosper and for you to start reaping its benefits.  Dividend growth investing is much the same way.  It takes consistent saving and investing as well as time and patience to let the power of dividend growth take hold.

That's why one of my favorite things is when one of the companies I own decides to pay out more in dividends.  You mean I get a pay raise just for owning a small piece of a company?  Not going and doing R&D for new products or technology.  Not selling any products.  Not managing any employees or inventory.  Not making sales calls.  All I had to do was have the foresight to invest some of my savings in excellent companies.  

On December 9th the Board of Directors at CVS Health Corporation (CVS) approved an increase in the quarterly dividend payment.  The dividend was increased from $0.50 to $0.55 which is an excellent 10.0% increase.  Assuming CVS will maintain this payout for all of 2022 will give CVS 1 year of dividend growth.  Shares currently yield 2.23% based on the new annualized payout.

The new dividend will be payable February 1st to shareholders of record as of January 21st.

Since I own 110.959 shares of CVS in my Rollover IRA, this raise increased my forward 12-month dividends by $22.19.  This is just the 1st raise I've received from CVS since  the 3rd raise that I've received from CVS since initiating a position in 2017.  

A full screen version of this chart can be found here.

CVS' dividend history has been all over the place.  From 1997 through 1999 lackluster raises came each year and then dividend growth was paused until 2004.  However, from 1004 through 2017 dividend growth was extremely impressive averaging a 23.2% year over year increase.

Due to the merger with Aetna the balance sheet became bloated and CVS has spent the last 4 years integrating Aetna and reducing debt.  Leverage is now at an acceptable level for CVS to start rewarding shareholders with raises once again after a 4 year pause.

Dating back to 1997 CVS' year over year dividend growth has ranged from 0.0% to 47.6% with an average of 13.6% and a median of 10.0%.

There's been 21 rolling 5-year periods over that time with annualized dividend growth ranging from 0.4% to 32.0% with an average of 15.2% and a median of 17.3%.

What's quite impressive is that despite 8 total years of 0.0% dividend growth CVS has still managed to have solid 10-year growth rates.  Out of the 16 rolling 10-year periods, CVS' annualized dividend growth has ranged from 7.6% to 27.1% with an average of 17.9% and a median of 19.0%.

The 1-, 3-, 5- and 10-year rolling dividend growth rates from CVS since 1997 can be found in the following chart.  

A full screen version of this chart can be found here.

For dividend yield theory I consider the fair value range to be the forward dividend yield +/- 10% compared to the 3 year moving average, the under/over value area to be to between 10%-20% deviation from the average and significant over/under value are greater than a 20% deviation from the average.

A full screen version of this chart can be found here.

CVS' 3-year average forward dividend yield is 2.98% which corresponds to a share price of $74 based on the new annualized payout.  

I consider the fair value range based on dividend yield theory to be the 3-year moving average yield +/- 10%.  That gives a fair value range of $67 - $82 and suggests that shares are trading above faire value at a price of $98.

Now that much of de-leveraging process is completed it'll be interesting to see if market participants value CVS closer to the ~1.5% dividend yield it had typically trade at between ~2013 to 2016.  If so that puts the fair value range up to $137 to $167.

Another quick and dirty valuation method is the Gordon Growth or Dividend Discount model.  This valuation method is based solely off the expected future dividends as well as your required return.  Based on a 10% discount rate and assuming CVS can maintain 8.0% annual dividend growth shares are worth around $119 per share.

A full screen version of this chart can be found here.

Reducing the expected long term dividend growth rate to 7% and keeping the 10% discount rate lowers the value of CVS to $78. 

Wrap Up

This raise increased my forward dividends by $22.19 with zero effort on my part.  That's right absolutely nothing to contribute to their operations.  Based on my Rollover IRA's current yield of 1.87% this raise is like I invested an extra $1,189 in capital.  Except that I didn't!  One of the companies I own just decided to send more cash my way. 

That's how you can eventually reach the crossover point where your dividends received exceed your expenses.  That's DIVIDEND GROWTH INVESTING AT WORK!  The beauty of the dividend growth investing strategy is that you build up your dividends through fresh capital investment as well dividend increases from the companies you own.

I've now received 26 raises from the companies in my Rollover IRA increasing my forward-12 month dividends by $307.09.

My FI Portfolio's forward-12 month dividends are $9,228.19  Including my FolioFirst portfolio's forward dividends of $178.19 brings my total taxable accounts dividends to $9,406.38.  My Roth IRA's forward 12-month dividends are $893.25.  My Rollover IRA's forward dividends are $4,058.19.  Across all accounts I can expect to receive $14,357.82 in dividends over the next year.

I've also started compiling dividend data on many of the companies that I own or would like to own.  CVS Health Corporation's can be found here which includes the dividend history (as far back as I can find without spending hours hunting it down), rolling dividend growth rates and dividend yield theory.  To see other companies that I've already gathered the data on you can check out the Dividend Companies page.  Check it out and let me know what you think.

Now that much of the de-leveraging process is complete do you think CVS will resume their annual dividend growth streak?  How do you handle pauses or freezes to dividend growth?  

Please share your thoughts below.