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Is CVS Health’s 4.6% Dividend Yield Safe?

CVS Health (NYSE:CVS) is paying investors a fairly high dividend these days, larger than normal. It’s not because the company has drastically increased its payout but because shares of CVS are crashing this year, down 27% since January. And when that happens, the yield goes up.

The company has reduced its guidance multiple times within the past year and investors are growing bearish on the stock. Despite having a broad presence in healthcare which includes pharmacy retail operations, health insurance, and home health, the stock is valued fairly lowly, trading at just eight times its estimated future profits. Investors today can buy the stock for right around its book value.

But just how safe is it as a dividend investment? Based on earnings, the stock’s payout ratio is around 45%, which suggests that there’s plenty of room for the company to continue paying it despite the seemingly high yield. Another way to evaluate dividend safety is via free cash flow. And in the trailing 12 months, the company’s free cash has totaled $5.3 billion and CVS has paid out a little less than $3.3 billion in dividends during that time frame. Here too, the dividend looks safe.

CVS has been struggling to generate much growth in recent quarters with sales up by just 3% in Q2 while operating income fell by 6%. Rising medical costs have weighed on its operations but this can still make for an excellent stock to own in the long haul, as demand for healthcare is likely only going to continue to increase in the future.

While CVS hasn’t been a great buy this year, it can be a great pillar for an investor’s portfolio for the long term.