yield-stockphotoEvery January, I attend the J.P. Morgan Healthcare Conference in San Francisco. It is the most important healthcare investing conference of the year and a very tough ticket to get.

I go with my eyes and ears open, searching for great, undiscovered small cap biotech stocks as well as listening to the presentations of the dividend-paying, big pharmaceutical companies.

For the past few years, one company that has impressed me is CVS Caremark (NYSE: CVS).

[ad#Google Adsense 336×280-IA]CVS isn’t just the drugstore on the corner that competes with Walgreen’s (NYSE: WAG).

It aims to be one of America’s most important providers of healthcare services.

Of course, you know about its retail stores, but CVS also works with employer groups and organizations, managing their pharmacy services.

This week, thanks to Gary K.’s suggestion, we’re taking a look at the dividend safety of CVS.

First of all, CVS’ yield is nothing to write home about at just 1.4%.

However, the company has raised its dividend every year for the past 11 years at a compound annual growth rate of over 22% per year. Over the past five years, the dividend has grown 29% each year.

Last year, CVS generated $3.8 billion in free cash flow.

It paid shareholders $1.1 billion in dividends, for a low payout ratio of 28.9%. In other words, for every dollar of free cash flow, CVS paid shareholders $0.29.

I like to see a payout ratio of 75% or lower to feel comfortable that the dividend is safe. At just 29%, CVS could double its dividend and it would still be well within my comfort zone.

Going forward, the company should generate even more cash. Wall Street analysts estimate that CVS’ free cash flow will come in at $5 billion this year, moving up to $5.4 billion next year and $6 billion in 2016.

So there is a lot of room for the company to boost its dividend and still have plenty of cash to reinvest in its business, use for buybacks and acquisitions or just save for the future.

Unless something goes unexpectedly and horrendously wrong, CVS should have gobs of cash to pay its dividend and continue to increase it at a rapid rate. Even if it experiences a rough year or two, it’s hard to imagine the company cutting its dividend at this point.

It may not pay a big dividend today, but in the future, CVS’ yield will likely be respectable.

In a few more years, it could even be a high yielder based on today’s stock price.

Regardless of whether the company raises the dividend, which I fully expect, the dividend appears rock solid.

Dividend Safety Rating: A

If you have a stock whose dividend safety you’d like me to analyze, leave the ticker symbol in the comments section below.

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— March Lichtenfeld


Source: Wealthy Retirement