Among the more stable stocks that have been more volatile than usual this year, CVS Health (NYSE:CVS) is clearly seeing this volatility play out again today. Shares of CVS stock surged 4% in afternoon trading on a couple of key catalysts investors seem to like. Importantly, today’s surge brings the stock into positive territory for the year, with many investors hoping the stock will continue to rally from here.
Today’s surge appears to be due to two key factors the market is viewing positively. First, the company announced that it would boost its quarterly dividend to 66.5 cents per share (up 10% year-over-year) and issued positive guidance. CVS’ management team now expects revenue to come in at $366 billion next year (around $20 billion higher than the market had predicted) and adjusted profits and cash flow numbers to come in at its previous forecast. That’s a positive thing considering the concerns about the state of the economy this year.
Secondly, CVS also announced changes to its pharmacy reimbursement model. The existing complex system that determines the reimbursement rate for medications will be revamped, allowing for more transparency and suggesting the company may be looking to get ahead of future regulatory changes.
Let’s dive into these factors and why they’re affecting CVS stock so positively today.
CVS Stock Surges on Positive Announcements
Any time a company issues better-than-expected guidance or even guidance in line with previous expectations, its stock price is likely to see a reaction. Given the strong top-line guidance and dividend boost CVS’ management team provided today, it’s clear existing investors like what they see. Indeed, as bond yields come down, dividend-paying stocks like CVS really do get a boost from such dividend hikes. The company’s trailing dividend yield of 3.5% will increase, providing significant capital returns to investors looking for a defensive place to hide in this market.
Fundamentally, CVS’ core business model appears to be strong, which is a key driver in its own right. However, a strong core business also allows the company to make changes its peers may be wary of making. The notable move to shift the company’s prescription drug pricing system to a more transparent version of the traditional model used by the industry could drive more business in the coming quarters. Thus, the higher revenue target and this move may be intertwined.
Ultimately, we’ll have to see how this move plays out in terms of CVS’ prescription margins moving forward. In that regard, there are plenty of unknowns.
However, I think the market’s reaction to this news as being broadly positive makes sense. This is a stock I’ve got on my watch list, and I will certainly monitor for updates from here. But suffice it to say this is good news for existing investors in CVS stock.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
