We recently compiled a list of the 10 Best Beaten Down Dividend Stocks to Invest in Now. In this article, we are going to take a look at where CVS Health Corporation (NYSE:CVS) stands against the other beaten down dividend stocks.
Dividend stocks have faced challenges over the past year due to the rising focus on tech stocks. However, the value of income remains strong, and investors haven’t overlooked dividend equities. As a result, US companies are now more focused on dividends, offering substantial payouts to shareholders. In fact, many tech companies have begun issuing dividends this year, thanks to strong cash flow on their balance sheets. While they could reinvest in growth, sharing profits with shareholders has become an appealing strategy to attract investors.
This means that with the changing market dynamics, high-quality companies with strong balance sheets that are trading at lower multiples have become more appealing. Dividend stocks often fall into this category, as they typically have stable business models and cash flows that allow them to consistently return earnings to investors. Dan Lefkovitz, a strategist for Morningstar Indexes, also highlighted this in the firm’s latest report:
“Investing in dividend-paying stocks is a good way to participate in equities over the long term. There have been long stretches when the dividend-paying section of the market has outperformed. Eventually, they’ll come back into favor. Dividend-paying stocks have a value bias. To the extent that there’s a rotation away from technology and growth into the value side of the market and more old economy sectors, that’s going to benefit the dividend-paying portion of the market.”
Another factor influencing the market trends is the Fed’s anticipated rate cuts. Investors believe the Fed is likely to start lowering interest rates in September, marking the beginning of a new easing cycle after one of its most aggressive tightening phases. The central bank began raising rates in March 2022 in response to soaring inflation, and they’ve remained at restrictive levels since July 2023. According to popular belief, dividend investors might benefit as rates decline. Lower rates can reduce bond yields, making dividend yields more appealing by comparison. In addition, companies with higher debt, such as utility companies and REITs, often benefit from falling rates and are typically among dividend payers.
If we set aside the impact of interest rates on dividend stocks, it becomes clear that they have made a substantial contribution regardless of market conditions. According to a study by S&P Dow Jones Indices, from 1926 to July 2023, dividends accounted for 32% of the broader market’s monthly total return, with the rest coming from capital appreciation. The report also underscored the power of compounding dividends. Without dividends, an initial investment in the stock market on January 1, 1930, would have grown to $214 by July 2023. However, with dividends reinvested, that same investment would have soared to $7,219 over the same period.
While there are encouraging signs for dividend stocks, they have struggled to keep pace with the broader market this year. The Dividend Aristocrats Index, which tracks the performance of companies with at least 25 consecutive years of dividend growth, has gained nearly 9% in 2024, compared with over 16.5% return of the broader market. With this, we will take a look at some of the best beaten down dividend stocks to invest in.
Our Methodology:
To compile this list, we began by examining stocks that have experienced a decline from their peak prices within the past three years. From this pool, we selected 10 dividend-paying stocks that have witnessed a drop of 25% or greater in their share prices over these three years. The rankings within the list are based on the extent of the decrease in share prices from their three-year highs to their current levels, with the list arranged in ascending order of these declines as of August 30, 2024.
We also measured hedge fund sentiment around each stock according to Insider Monkey’s database of 912 funds as of Q2 2024. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
CVS Health Corporation (NYSE:CVS)
3-year high-to-low share price decrease as of August 30: 47.8%
CVS Health Corporation (NYSE:CVS) is an American healthcare company that operates a retail pharmacy chain. The stock has fallen by over 29% since the start of 2024 as the company could not satisfy investors with its quarterly earnings this year. The company, in its Q2 2024 results, lowered its earnings forecast for the full year, because of the challenges in its Health Care Benefits segment, which includes its insurance division, Aetna. This marks the second time it has reduced its 2024 forecast. The company had previously lowered its guidance following its Q1 results for the same reason.
While investors are displeased with this decision, CVS Health Corporation (NYSE:CVS) had a significant reason for the revised outlook: rising medical costs. As things gradually return to normal, surgeries that were delayed or impossible due to COVID-19 are now being scheduled again, leading to an increase in expenses. This was also highlighted by Ariel Investments in its Q2 2024 investor letter. Here is what the firm has to say:
“American healthcare company, CVS Health Corporation (NYSE:CVS), also declined following disappointing earnings results and a subsequent reduction in full year guidance. The miss was primarily due to increased utilization of Medicare Advantage plans and weakness in the health services segment driven by the loss of a large client and continued pharmacy client price improvements. In response, management reiterated its focus on improving margins and enhancing its positioning in Medicare Advantage. CVS believes the program can remain an attractive business for Aetna and CVS Health over time and will construct its bid for 2025 as a multi-year repricing opportunity across plan level benefits. Meanwhile, CVS continues to return capital to shareholders through dividends and a recent accelerated share repurchase transaction.”
That said, CVS Health Corporation (NYSE:CVS) believes that it is well-positioned for success both now and in the future. It is accelerating innovation by implementing more transparent pharmacy reimbursement models, increasing the adoption of biosimilars, and enhancing patient outcomes through its connected healthcare delivery assets. Its integrated model and strategic approach enable it to perform effectively in a challenging environment, delivering the value its customers expect. In the second quarter of 2024, the company reported revenue of $91.2 billion, which showed a 2.6% growth from the same period last year.
CVS Health Corporation (NYSE:CVS) also cut its guidance for operating cash flow to $9 billion from $10.5 billion in the previous quarter. Despite this reduced guidance, its strong cash position is noteworthy, particularly when considering dividends. In the first six months of the year, the company generated $8 billion in operating cash flow. Its trailing twelve-month levered free cash flow came in at $5.58 billion. The company offers a quarterly dividend of $0.665 per share and has a dividend yield of 4.65%, as of August 30.
As of the close of Q2 2024, 60 hedge funds in Insider Monkey’s database held stakes in CVS Health Corporation (NYSE:CVS), down from 54 in the previous quarter. These stakes have a total value of over $2.77 billion. With nearly 13 million shares, Pzena Investment Management was the company’s leading stakeholder in Q2.
Overall CVS ranks 7th on our list of the best beaten down dividend stocks to invest in now. While we acknowledge the potential for CVS as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CVS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.