CVS Caremark Corp. (CVS) announced a new $2 billion share repurchase program. The program is likely to expire at the end of 2011.
CVS Caremark’s strong balance sheet has enabled management to return value to shareholders. Cash and cash equivalents at the end of the first quarter of 2010 were $1,047 million, down from $1,086 million at the end of December 2009.
As part of the $2 billion share repurchase program (announced in November 2009), the company repurchased about 25.7 million shares for $887 million during the first quarter of 2010, and was left with $613 million of authorization. The remaining authorization was also exhausted during the current quarter.
During the first quarter of 2010, CVS generated free cash flow of more than $660 million, up from $310 million in the year-ago period. We are pleased to note that based on better receivables management, reduction in capital expenditure and greater focus on working capital, CVS increased free cash flow guidance for 2010 to $2.5 billion – $2.75 billion, up from the earlier guidance of $2 billion – $2.5 billion. Moreover, we also note that earlier this year, CVS Caremark increased quarterly dividend by 15% to $0.0875 per share.
We believe in the long term potential of the company. The recently passed healthcare reform is likely to include more than 32 million people in the US under the insurance bracket. Since Pharmacy Benefit Management (PBM) is aimed at lowering healthcare costs over the long term, increased coverage would benefit the company.
We remain optimistic about domestic demographic trends, which are expected to drive utilization rates for years to come as the population ages. Thus, Retail Pharmacy operators like CVS Caremark should be able to grow and capture market share. Additionally, the company’s mail order service is gaining popularity, which will aid in providing additional top-line opportunities.
Although the PBM segment is suffering due to loss of contracts, CVS is confident of a better scenario in 2011. We maintain our Neutral recommendation on the stock.
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