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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

CVS Caremark

January 14th 2011 CVS Caremark
NYSE Symbol: CVS
Industry: Drug store chains
Price as of 1/14: $35.08

Two weeks into the New Year and the major averages continue to grind higher unwilling to sell off at least until we see more earnings from more blue chip companies. So far the earnings look good from the likes of Alcoa, Intel, Lennar, and JP Morgan. Plenty more earnings come flooding in next week from the likes of Apple, IBM, Goldman Sachs, Google, UnitedHealth Group, GE, Bank of America, and Citigroup. The financials are starting to outperform which is a good thing. Nothing wants to sell off, but as we know the major averages don't go straight up. This week ahead of two huge weeks of earnings reports, we'll play it conservatively by featuring the largest US provider of prescription drugs, CVS Caremark. The company is not flashy, but is a steady blue chip that provides solid earnings. With flu season upon us, CVS Caremark is in the sweet spot for earnings and sales. Just this week they raised their dividend and will go ex-dividend next week on Wednesday.

Back at the start of November, CVS Caremark reported in-line earnings and in-line sales. Net income came in at $820 million or 59 cents a share down from $1.02 billion or 71 cents a year ago. Revenue came in at $23.9 billion verse estimates of $23.91 billion. Management went on to make comments indicating that the consumer remains cautious which has worked in their favor as people purchase their private label and proprietary products while shopping close to home. In addition, management reiterated guidance for free cash flow this year of approximately $2.5 billion and expects to generate significantly more free cash on an annual basis for the next five years as the company exercises disciplined capital allocation practices to achieve the highest possible return for their shareholders.

As a result of the improving cash flow, CVS Caremark was able to increase their quarterly dividend by 43% to 12.5 cents a share for the quarter or 50 cents for the year. That translates into a 1.4% yield. Currently the stock is trading for 12 times earnings, less than one times sales and 1.29 times book value of $27 a share. A pretty good valuation. Last fall, RBC initiated CVS Caremark with a Sector Perform with a price target of $45 a share. CVS Caremark is not a growth stock, but a slow and steady blue chip that should provide some income and capital appreciation over the long haul.