Motley Fool: Healthy prospects for ‘rebuilding’ CVS Health
Most people know CVS Health (NYSE: CVS) for its network of retail pharmacies that features almost 9,700 locations, including some within Target stores. CVS is also known for its 1,100-plus in-store Minute Clinics. The main driver of its success, though, is CVS’ pharmacy benefits management business.
A PBM negotiates between payers and makers of drugs to bring prices down, taking a small chunk of the savings as its reward. CVS is one of the United States’ largest PBMs – and in this industry (as in many others), size confers essential negotiating leverage. A client retention rate around 97 percent shows that it’s also keeping its customers happy.
Competition is strong between CVS and Walgreens Boots Alliance, which stole away two major customer accounts representing roughly 40 million prescriptions last year. CVS’ stock has slipped over the past year, and CEO Larry Merlo sees 2017 as “a rebuilding year,” aiming to “return to healthy levels of growth.”
Both CVS and Walgreens have a major tailwind in the ongoing aging of America, which will only increase demand for its services. CVS Health is projected to see annual earnings growth in the double digits over the next five years. Add that to a reasonable valuation and a dividend that recently yielded 2.6 percent, and you’ve got an intriguing long-term portfolio candidate. (The Motley Fool has recommended CVS Health.)
Ask the Fool
Q: Can you explain Roth IRAs? – B.T., Hattiesburg, Mississippi
A: We’ll explain not only Roth IRAs, but also Roth 401(k)s. Just as there are two main kinds of IRAs – traditional and Roth – many companies now offer their workers the choice between traditional and Roth 401(k)s.
With a traditional IRA and 401(k), you contribute pretax money that reduces your taxable income and, therefore, your tax bill for the year. For example, if you earn $60,000 and contribute $5,000, your taxable income drops to $55,000. When you withdraw the money in retirement, it’s taxed as ordinary income to you.
With Roth IRAs and 401(k)s, though, you contribute post-tax money that doesn’t deliver any upfront tax break. But you eventually get a big tax break when you withdraw from the account in retirement – because if you follow the rules, it’s all tax-free. For 2017, you can contribute up to $5,500 and $18,000 to IRAs and 401(k)s, respectively, with an additional $1,000 and $6,000 allowed, respectively, for those age 50 or older.
If you contribute $8,000 per year for 20 years and your contributions grow by 8 percent on average annually, you’ll end up with almost $400,000 – and you can take it all out tax-free in retirement!
Q: What good books cover stock market history? – P.L., Brooklyn, New York
A: Check out the classic “Learn to Earn: A Beginner’s Guide to the Basics of Investing and Business” by Peter Lynch and John Rothchild (Simon & Schuster, $17) and Peter Bernstein’s “Capital Ideas: The Improbable Origins of Modern Wall Street” (Wiley, $20).
My dumbest investment
My dumbest investment was selling Amazon.com for a 50 percent gain at $156 per share. Why did I sell? Well, I think I took the profits in order to purchase another stock that seemed more safe and stable. It did indeed turn out to be a nice, safe position, but looking back, my investment in Amazon would be worth over $100,000 today if I still had it. Yikes. – B.P., Bakersfield, California
The Fool responds: Shares of Amazon have indeed been on a tear, averaging annual growth rates above 30 percent over the past five, 10 and 20 years – enough to turn a $5,000 investment in 1997 into more than $2.4 million today.
You did what many people do when they’re looking for a certain percentage gain: They sell the stock after achieving that hoped-for gain. You can reap profits with such a system, but greater profits can await if you simply hang on to powerful performers for many years. The trick is to be patient and not get rattled by occasional pullbacks. Amazon, for example, fell by more than 10 percent between early October and early December 2016.
Don’t hold on blindly, though. You need to keep up with your holdings to make sure their growth prospects and competitive advantages don’t shrink. If you’re not sure about selling, you might just sell a portion of your shares, giving the rest more time to grow.