Photo by National Cancer Institute on Unsplash

CVS Health Corp (CVS) is an American healthcare giant which operates a retail pharmacy chain, provides healthcare insurance and CVS Caremark – a pharmacy benefits manager. Recently, the company has made headlines for the right reasons with solid share price growth on the back of impressive performance over the last year. The company's share price has risen by nearly 30% over the course of the past year.  

(Click on image to enlarge)

CVS Health Corp Share Price: April 2019 – April 2022

Currently CVS Health sits around 100 cents a share, a 10% discount on January's peak following a sustained dip over the last week. The company's share price fell consistently throughout the week commencing March 28. Prior to that, the healthcare giant had outperformed the S&P 500 since the beginning of the year. 

2021: A remarkable year

CVS Health highlighted its impressive 2021 performance when it released its results for the year in February. The healthcare giant had demonstrated outstanding growth for a blue-chip firm, with sales rising to $292.1 billion, up 8.7% over the previous year. Growth was seen across the company's three businesses, all of which benefited from economic conditions brought about by the Covid-19 pandemic and the US vaccination programme. 2021 figures also mark the fifth consecutive year in which the healthcare giant was able to grow revenue. 

(Click on image to enlarge)

Healthcare benefits segment

The firm's healthcare benefits segment offers a range of insured and self-insured medical, pharmacy, dental and behavioural health products and services. In 2021, the firm reported a strong year of growth in its Medicare membership, primarily driven by growth in the Government Services business. CVS Health saw its total medical membership grow by 0.4 million year-on-year to 23.8 million medical insurance customers at the end of 2021, representing a 1.7% increase from 2020. The growth in membership, paired with higher health insurance premiums, accounted for adjusted revenue from the segment reaching $82.1 billion, equating to an 8.9% year-on-year increase. The growth was sustained throughout the year with 8.4% growth recorded in the final quarter of 2021.

However, adjusted operating income from the business unit decreased 19.0% compared to the prior year. This was primarily driven by the net impact of the Covid-19 pandemic which was apparently more costly to the business segment in 2021 than in 2020. Covid-19 related costs included the impact of elective procedures deferrals and other discretionary utilizations.  

Pharmacy services segment

The pharmacy services segment provides benefit management solutions to employers, health plans, government employee groups and government sponsored programmes. This area of the business also saw impressive revenue growth primarily driven by increased pharmacy claims volume. Total pharmacy claims processed by CVS Health grew year-on-year by 6.2% to 2.2 billion and this was reflected in revenue growth which grew by 7.8%. Revenue from the segment reached $153 billion from $141.9 billion the year before. 

The increase in claims processed was largely driven by new business, Covid-19 vaccinations, as well as increased new therapy prescriptions. These business activities had been negatively impacted throughout 2020 as the pandemic hit. The firm contended in its annual report that, excluding the impact of Covid-19 vaccinations, total pharmacy claims processed increased 4.2% year-on-year, representing solid and sustainable growth. 

Retail segment

The retail segment fulfills prescriptions, provides patient care, and sells a wide assortment of health and wellness products as well as general merchandise. In 2021, it recorded revenue of $100.1 billion, representing a 9.8% growth rate year-on-year. CVS Health contends that growth was primarily driven by increased prescription and front store volume as well as the administration of Covid-19 vaccinations and diagnostic testing. In fact, they estimate that approximately 45% of the segment's revenue growth in 2021 was the result of sales related to the deadly coronavirus. 

Prescriptions fulfilled increased 8.4% year-on-year. Although the adjusted figure, excluding the impact of Covid-19 vaccinations, was registered as a 4.3% increase, demonstrating a solid and stable level of growth. Adjusted operating income from the segment as a whole reached $7.6 billion in 2021, representing 24.0% growth compared to the prior year and reflecting the impressive increase in business activity. 

Profitability

Despite impressive revenue growth, the firm's operating income actually fell 5.2% in 2021. The company says that was due to a number of reasons including the write down of operating lease right- of-use assets and property and equipment in connection with planned retail store closures over the next three years. However, adjusted operating income increased by 8.1%, with the company highlighting the role of Covid-19 and its treatment in generating the unique operating environment. CVS Health also reported $8.40 in non-GAAP (adjusted) diluted earnings per share (EPS). This equates to a 12% growth rate compared to 2020.

Meanwhile, pre-tax profit in 2021 was equal to $10.4 billion, the highest figure recorded in the past five years. 

Future prospects

The tremendous revenue growth experienced in 2021, largely driven by footfall and sales related to Covid-19 vaccinations and testing, is unlikely to be repeated. CVS Health confirmed a full year guidance range of $8.10 to $8.30 adjusted EPS for 2022. However, the healthcare giant noted that Covid-19 still creates challenges in issuing future guidance, citing the risk of additional surges, potential new testing or vaccine protocols and legislative changes. 

Analysts are forecasting that CVS Health will grow its non-GAAP (adjusted) diluted earnings per share (EPS) by 6% annually over the next five years, reflecting growing demand for its services, notably health insurance. The company has recently authorized a 10% raise in the quarterly dividend to $0.55 per share, underlining its promising fundamentals and positive prospects.  

It is estimated that the global health insurance industry will grow 4.6% annually from $2.8 trillion in 2020 to $3.9 trillion by 2027 amid increasing healthcare costs and aging populations around the world. CVS Health with its massive health insurer arm, Aetna, is likely to benefit from this trend, possibly more so than some of its peers. It is highly likely that the retail side of the business will also benefit from this trend. If this forecast stays true, the long-term prospects for the healthcare giant appear positive.