Make sure you're earning the maximum return on your cash; Taking a look at CVS's stock; Kayaking in New Zealand
1) It's good to see the mainstream media picking up on the story that I've been pounding the table on since April...
I'm talking about how some wealth-management firms are screwing their customers by paying them minimal interest on their cash when the market rate is around 5%.
Here's a recent story in Barron's: Some Financial Giants Pay Paltry Rates on Investors' Cash. Where to Put Your Money. Excerpt:
Last week, Wells Fargo's (WFC) CFO said the bank's wealth management unit had raised the interest rate it pays on some clients' uninvested cash to more closely align with money-market funds. Investors may be asking why it took so long.
Wealth management firms such as Wells Fargo, Charles Schwab (SCHW), Morgan Stanley (MS), and LPL Financial (LPLA) have been placing customers' uninvested cash in so-called sweep accounts that pay trifling amounts of interest at a time when prevailing short-term rates are near 5%.
And as the article continues, this practice is under pressure:
This common industry practice can be very profitable for companies, less so for customers. It's now under intense pressure as legal and regulatory scrutiny increases.
Investors have recently filed lawsuits accusing companies of breach of fiduciary duty and are seeking class-action status and monetary damages...
The Securities and Exchange Commission is also looking into cash sweep practices at several of these companies, according to regulatory disclosures.
I'm going to keep writing about this topic because it's scandalous what many of these big firms are doing – and because moving your excess cash to an account – or a firm – that offers market rates is the biggest no-brainer I've ever seen.
It's easy to do, you'll earn free money and – depending on how much you're keeping in cash – it could be big money.
For more, see the five articles I've written about this:
- Schwab was screwing me over (April 18)
- My readers' comments on Schwab, Vanguard, and Fidelity; Why my banking-expert friend is short Schwab (April 19)
- Transferring my accounts from Schwab to Fidelity; Call with my Schwab rep; A look at Vanguard and Interactive Brokers; A reader disagrees with my characterization of Schwab (April 22)
- Reader feedback on Vanguard versus Fidelity (April 29)
- My readers thanked me for inspiring them to earn higher returns on their cash (September 26)
2) In my September 30 e-mail, I linked to this Wall Street Journal article, Glenview Capital Plans Push for Changes at CVS, and wrote:
I was interested to see that my old friend Larry Robbins of Glenview Capital Management has established a large position in CVS Health (CVS) and is engaging with the company's leadership...
Larry is one of the smartest investors I know, so I've added CVS to my list of stocks to take a look at...
Yesterday, CVS announced a settlement with Glenview in which it will add Larry and three others to its board of directors. This WSJ article has more on the story: CVS Adds to Board in Deal With Glenview. Excerpt:
Wall Street has soured on CVS, which owns its namesake drugstores as well as health insurer Aetna and pharmacy-benefit manager CVS Caremark, because of repeated earnings shortfalls largely tied to its insurance unit.
In the past several months, CVS has executed a strategic review, replaced its CEO with company veteran David Joyner and announced a new leader for Aetna from outside CVS.
Glenview's drive for a new direction at CVS emerged in late September, when Robbins met with company leaders to propose ways to improve its operations.
So today, I'm finally getting around to taking a closer look at CVS...
While the stock popped more than 5% yesterday on the news, it has been a dog over time. CVS shares have been cut in half since the recent peak at the beginning of 2022, and today sit at a level they first reached 11 years ago, as you can see in this 20-year chart:
So let's take a look at CVS's revenues and operating income over the same period:
The story is similar on the cash-flow statement: CVS generated prodigious free cash flow ("FCF") until it fell off a cliff two years ago. You can see the collapse in the below chart of the company's cash flow from operations, capital expenditures ("capex"), and FCF:
For most companies, stocks tend to follow earnings... and that indeed is the case here.
In CVS's most recent quarter, operating income was down 57% year over year, so no wonder the stock has been cut in half since its earnings and stock peak in 2022.
Turning to the balance sheet, the company's net debt has soared in the past decade:
How is this possible, given how much free cash flow CVS has generated?
Another look at the cash-flow statement provides the answer...
In addition to paying a steady dividend (the stock is currently yielding about 4.8%) and buying back modest amounts of stock, CVS made three huge acquisitions:
In 2015, it acquired Omnicare, a provider of pharmacy services to long-term care facilities, for approximately $12.7 billion as well as Target's (TGT) pharmacy and retail clinic businesses for $1.9 billion.
In 2018, it acquired Aetna, a major health insurance company, for approximately $70 billion – a combination of stock and more than $40 billion in cash, funded by issuing debt.
And last year, CVS acquired home-based care provider Signify Health for $8 billion and Oak Street Health, a primary care provider focused on older adults with Medicare, for $10.6 billion.
In total, in the past decade, CVS has generated $92.1 billion in FCF but has spent $73.8 billion in cash on acquisitions, paid out $24.7 billion in dividends, and repurchased $23.8 billion in stock.
That equates to a deficit of $30.2 billion, which is the main reason debt has risen so much.
Net debt today is $73 billion, which is equal to 4.8 times trailing 12-month earnings before interest, taxes, amortization, and depreciation ("EBITDA"). That's not a dangerous level, but the company clearly needs to reduce it... which is why Larry Robbins was quoted in the WSJ article above saying: "There's universal alignment that debt reduction will be a priority until such time as that balance sheet normalizes."
Finally, turning to valuation, as of yesterday's close, CVS's market cap is about $71 billion. Adding $73 billion of net debt means the enterprise value is $144 billion – which means the stock is trading at a mere 0.4 times revenues, 8.3 times trailing EBITDA, and 10 times this year's and 8.5 times next year's consensus analysts' earnings-per-share estimates.
In summary, I don't love CVS's financial picture... but it doesn't scare me away, either.
If Larry and the other new board members can work with the new CEO to revive earnings, this stock could double.
But I would really need to understand, believe in, and see progress toward their plan to achieve this before considering putting money to work with the stock... so CVS looks like a wait-and-see situation right now.
3) On Monday, my wife Susan and I did our third kayaking trip in the past week, paddling down New Zealand's Waikato River.
The coolest part was when we waded 15 minutes up a narrow crack called "The Squeeze" (the water was over our heads much of the time) to a warm, geothermal-fed waterfall – what fun!
Later we went for a sunset dinner sail on Lake Taupō – note the huge Māori rock carving in the wall behind us in the picture:
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.