Conservative · Income · Portfolio Changes

Portfolio Changes: CVS Health and International Paper

       Considering ongoing headwinds in the pharmacy benefits management space; negative reimbursement issues in its long-term care business; and the short-term cost effects of the Aetna integration, I am removing my position in CVS Health (NYSE: CVS – $53.39) from the conservative list and moving the position to the income account. CVS has appreciated about 72% since being added to the conservative portfolio, not including dividends, but short-term prospects are not well-defined. The current dividend payout for the company is amply covered at $2.00 per share and yielding 3.7%. The guidance from management for 2019 was disappointing and Street estimates are now at $6.81 per share, down from $6.96 last year. Therefore, I believe positions are better served in the income portfolio until conditions begin to improve for the healthcare giant. Hopefully high-quality CVS can regain its footing and deliver $7.30 per share for 2020 providing for a price earnings ratio at current levels of 7.3 and regain Wall Street’s favor.

       In addition, I am removing International Paper Co. (NYSE: IP – $ 45.62) from the income account to make room for CVS Health. International Paper will remain a consideration for aggressive accounts, however, and the 4.4% dividend yield will add to long-term total returns over time. IP sees mixed business prospects for 2019. The North American Industrial Packaging unit is positioned to benefit from healthy box demand and should experience decent end-market conditions for fluff pulp. In the Global Cellulose Fibers division, management is optimistic that various improvement initiatives will lead to a gradual recovery in volume. Specifically, the business was slow to respond to a shift in customer mix. Management noted, however, that this will have a negative impact through the second quarter of the year. Lastly, the Printing Paper business is performing well. The segment’s ample negotiating power with customers should help price hikes. Management’s guidance includes full-year EBITDA of between $4.3 billion and $4.4 billion. Based on these assumptions, consensus estimates are looking for share earnings of $5.24 in 2019, followed by mostly flattish year-over-year comparisons in 2020. Yet, the shares remain very reasonably valued at 8.7 times estimated 2019 and 2020 earnings.

       I will be researching a replacement for CVS Health for the conservative candidate list and will post an alternative consideration over the next week.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s