Is CVS Stock an Undervalued Dividend Stock to Buy?

0:00 CVS stock is holding up relatively well amid the headwinds facing the company. The current administration and administrations past have tried to work on policy improving affordability in healthcare in the United States and that will likely remain an ongoing discussion and that will likely be a negative impact to CVS longer term. But given its current market price is this stock a buying opportunity? I'm going to answer that question in this video. I want to thank The Motley Fool for sponsoring this video. Visit fool.com/parKev for the 10 best stocks to buy now. So one thing to note about CVS, it has a diverse business segment. It has its physical footprint and it also has the insurance business, the pharmaceutical side of the business. It's an absolutely

0:45 massive company that you might not be aware of. In the year that just ended for the company in December of 2025, it reported $402 billion in revenue, which is up 7.8% from the same time last year. Now the analysts that are following the company, the forecast suggests that its revenue growth rate will slow down over these upcoming years. Recall the Medicare Advantage price increases that the administration put out were disappointing for healthcare providers, United Health and CVS Health included. Still the company's forecast to increase its revenue from $402 billion in 2025 all the way up to $443 billion by December of 2028. This is despite the fact that the company will

1:32 likely have fewer physical locations as consumers are opting not to visit these locations as much as previously. So CVS was never a very profitable company to begin with and the recent headwinds have shrunk margins further still. It's operating cash flow to sales ratio totaled just 2.6% in the most recent trailing 12-month period up slightly from 2.4% in the year before. At its peak this company generated operating cash flow to sales of 6.3% in 2021, but remember this was during the pandemic. People were visiting its healthcare offices to get tested for COVID and to pick up certain medicines associated with COVID. And so since the boom for the business during that time,

2:18 it's been going backwards since that moment. So given the company's current situation and forecasts for the near term, I would not want to be paying a premium price for this business. Thankfully the stock is not traded at a premium and in fact is trading at a discount to the average stock in the S&P 500. When I'm measuring this company on a forward price to earnings basis, it's trading at 10.23. On a forward price to operating cash flow is just 9.5. So this is less than half the average valuation of the average stock in the S&P 500 index. So you are getting a discount with CVS Health stock and as I mentioned, it deserves to be trading at a discount. The prospects for its various business segments are not very attractive. The physical segment, people

3:04 are visiting brick and mortar locations less and less frequently. So it's thousands of locations are becoming a competitive disadvantage. Still there is an opportunity for CVS to use those brick and mortar locations as a competitive advantage as some companies like Walmart and Target have figured out how to do. CVS has not managed that feat just yet. Still that is an unexploited opportunity that I think with enough management attention, they can figure out how to optimize their physical footprint and maximize the value of each location. I also updated today my calculation for CVS Health and fair value using my proprietary discounted cash flow valuation model and I calculate this

3:51 business is worth $92 per share compared to its current market price of just $73. This company is still a cash flow generating machine because of its massive size. I showed you $400 in revenue. The company's estimated to generate $8 billion in free cash flow in 2026 and I'm forecasting that grows to $12 billion by 2028. So even though the top line of the company is not expected to grow all that much, efficiencies and opportunities like I mentioned earlier could allow the management team to extract more profits from existing sales. The reason to own CVS Health is not because the company has great prospects in the future, but the reason to own CVS Health is because of the attractive

4:37 valuation. Things are not looking good, but the stock price reflects a lot more than the existing pessimism surrounding the business. Revenue growth rates are not likely to be exciting and the current administration continues putting pressure on healthcare companies and I expect that will be the case even with further administration. People in the United States and rightfully so are not happy with the affordability and value they're getting from the healthcare industry. I think everyone agrees that healthcare is not working effectively and there needs to be optimizations and improvements, but nobody has a great plan to make those optimizations and improvements. Everyone will complain, but there hasn't really been any

5:23 effective plan that surfaced to address this situation. So to answer the question I posed in the headline, is CVS Health stock a buy, a hold or a sell? I would rate this stock as a buy. But it is a risky situation. The prospects are not great and headwinds persist and so this should only be considered for investors that are willing to tolerate the risk that this might be a value trap rather than a value stock. Hey, if you value my process for researching stocks, I think you'll appreciate access to my spreadsheet containing my discounted cash flow valuations which calculate a fair value for over 200 companies. It answers the question, what's a good price to pay for a certain stock? You can get access by

6:10 joining our channel at the investor tier or above. See the link in the description or click the join button below to learn more.