Zacks_Analysts' Blog : CVS Sanctions Share Repurchase - Analyst Blog

The leading provider of prescriptions and related health care services, CVS Caremark Corporation (CVS) recently announced a share buy back program worth $4.0 billion in order to enhance its shareholders’ value. Under the new authorization, the company plans to repurchase shares worth approximately $1 billion by the end of 2011. CVS also expects to complete its $2 billion share repurchase program, which was authorized in June 2010, by the end of this year.  

CVS exited the second quarter of fiscal 2011 with cash and cash equivalents of $2.2 billion, up from $1.42 billion at the end of March 2010. Moreover, the company generated $800 million in free cash flow during the quarter, thus bringing free cash flow to $2.4 billion year-to-date, which was more than double compared with the prior-year period.

In 2011, CVS Caremark expects to generate free cash flow in the range of $4−$4.2 billion with potential for further growth in 2012 and beyond. Strong cash flow has enabled management to return value to shareholders.  Earlier, in October 2010, CVS had projected a dividend-payout ratio of approximately 25%−30% by 2015. 

Being one of the largest domestic integrated pharmacy service providers, CVS operates through two business segments: Retail Pharmacy and Pharmacy Services.

After several quarters of declining revenues due to disappointing results in its PBM segment, we are encouraged by the improved performance of CVS’ Pharmacy Services segment for the second consecutive quarter. We are also appreciative about the company’s recent victory over its major rival in the PBM segment, Medco (MHS) for Medicare Part D business of Universal American (UAM), the highly-valued FEP contract for three years as well as the biggest US public pension fund CalPers.

Despite continued margin pressure, we remain confident about CVS Caremark’s longer-term potential based on its retail execution, deployment potential and strong 2012 generics cycle. Moreover, we believe the healthcare reform will open up a big opportunity for the company. Presently, we remain ‘Neutral’ on CVS.