CVS Health Corporation (NYSE:) is a U.S.-based pharmacy chain with offerings throughout the entire health care spectrum. Michael Burry is heavily backing CVS stock and it has seen a more than 25% increase in value over the past year. This stock has my full support.

Sales Growth

CVS recorded a sublime second quarter, with year-over-year revenue growth of 11.1%. The continued growth in Government services business as well as a 13.80% increase year-over-year in medical memberships benefited the group.

Karen Lynch (CEO of the Group) stated, “This quarter was markedly by broad sales performance and earnings outperformance as well as sequential operational margin improvement.”

Operating Efficiency

I directed the headline numbers and found CVS’ operating efficiency to be the catalyst for its strong numbers. The company has seen its days of outstanding sales decrease by 1.63 since June 2020 while operating margins have increased by 1.96%. The improved year-to date interest coverage rate (+21%) has led to larger after-interest margins that equity investors can benefit from.

CVS’ net profit margin (2.60%) as well as cash from operations ($14.18billion) is at an all-time high over the past five years, potentially leading to increased dividend payouts.

Dividend Capacity

I believe CVS has plenty of dividend capacity, especially since it has suspended its share repurchase program and decided to compensate investors with dividends only. CVS shares have a dividend yield of 2.3% and a dividend yield ratio (4.42%) that is higher than its 5-year median yield (10.14%). Also, the payout ratio of CVS stock is 15.20% less than its 5-year median.

These ratios are not enough to make it seem like CVS is losing its dividend potential.

Wall Street’s Take

Average CVS price target is $100.50, with a 17.5% upside.

Wall Street believes the stock is strong buy, with 9 Buy ratings and 1 Hold rating. It will likely reach $100 within the next 12 months. 5-star analyst Ricky Goldwasser of Morgan Stanley (NYSE:) placed the latest and highest price target of $114 on the stock, citing underappreciated cost-cutting and capital deployment as her main reasons.

Concluding Thoughts

CVS looks good all around. High-quality, sustainable topline revenues are being managed with efficiency. This could result in both capital gains as well as strong dividend income for investors.

Disclosure: Steve Gray Booyens held a position in CVS at the time this article was published.

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