Stock Analysis on Net

CVS Health Corp. (NYSE:CVS)

Present Value of Free Cash Flow to Equity (FCFE) 

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In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company asset base.


Intrinsic Stock Value (Valuation Summary)

CVS Health Corp., free cash flow to equity (FCFE) forecast

US$ in millions, except per share data

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Year Value FCFEt or Terminal value (TVt) Calculation Present value at 9.21%
01 FCFE0 18,327
1 FCFE1 19,449 = 18,327 × (1 + 6.12%) 17,809
2 FCFE2 19,949 = 19,449 × (1 + 2.57%) 16,726
3 FCFE3 19,753 = 19,949 × (1 + -0.98%) 15,166
4 FCFE4 18,858 = 19,753 × (1 + -4.53%) 13,257
5 FCFE5 17,333 = 18,858 × (1 + -8.08%) 11,158
5 Terminal value (TV5) 92,123 = 17,333 × (1 + -8.08%) ÷ (9.21%-8.08%) 59,302
Intrinsic value of CVS Health Corp. common stock 133,418
 
Intrinsic value of CVS Health Corp. common stock (per share) $106.02
Current share price $77.40

Based on: 10-K (reporting date: 2023-12-31).

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.


Required Rate of Return (r)

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Assumptions
Rate of return on LT Treasury Composite1 RF 4.53%
Expected rate of return on market portfolio2 E(RM) 13.63%
Systematic risk of CVS Health Corp. common stock βCVS 0.51
 
Required rate of return on CVS Health Corp. common stock3 rCVS 9.21%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

2 See details »

3 rCVS = RF + βCVS [E(RM) – RF]
= 4.53% + 0.51 [13.63%4.53%]
= 9.21%


FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

CVS Health Corp., PRAT model

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Average Dec 31, 2023 Dec 31, 2022 Dec 31, 2021 Dec 31, 2020 Dec 31, 2019
Selected Financial Data (US$ in millions)
Common stock dividends 3,138 2,910 2,644 2,644 2,615
Net income attributable to CVS Health 8,344 4,149 7,910 7,179 6,634
Revenues from customers 356,623 321,629 290,912 267,908 255,765
Total assets 249,728 228,275 232,999 230,715 222,449
Total CVS Health shareholders’ equity 76,461 71,015 75,075 69,389 63,864
Financial Ratios
Retention rate1 0.62 0.30 0.67 0.63 0.61
Profit margin2 2.34% 1.29% 2.72% 2.68% 2.59%
Asset turnover3 1.43 1.41 1.25 1.16 1.15
Financial leverage4 3.27 3.21 3.10 3.32 3.48
Averages
Retention rate 0.57
Profit margin 2.58%
Asset turnover 1.28
Financial leverage 3.28
 
FCFE growth rate (g)5 6.12%

Based on: 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31).

2023 Calculations

1 Retention rate = (Net income attributable to CVS Health – Common stock dividends) ÷ Net income attributable to CVS Health
= (8,3443,138) ÷ 8,344
= 0.62

2 Profit margin = 100 × Net income attributable to CVS Health ÷ Revenues from customers
= 100 × 8,344 ÷ 356,623
= 2.34%

3 Asset turnover = Revenues from customers ÷ Total assets
= 356,623 ÷ 249,728
= 1.43

4 Financial leverage = Total assets ÷ Total CVS Health shareholders’ equity
= 249,728 ÷ 76,461
= 3.27

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.57 × 2.58% × 1.28 × 3.28
= 6.12%


FCFE growth rate (g) implied by single-stage model

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (97,404 × 9.21%18,327) ÷ (97,404 + 18,327)
= -8.08%

where:
Equity market value0 = current market value of CVS Health Corp. common stock (US$ in millions)
FCFE0 = the last year CVS Health Corp. free cash flow to equity (US$ in millions)
r = required rate of return on CVS Health Corp. common stock


FCFE growth rate (g) forecast

CVS Health Corp., H-model

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Year Value gt
1 g1 6.12%
2 g2 2.57%
3 g3 -0.98%
4 g4 -4.53%
5 and thereafter g5 -8.08%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 6.12% + (-8.08%6.12%) × (2 – 1) ÷ (5 – 1)
= 2.57%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 6.12% + (-8.08%6.12%) × (3 – 1) ÷ (5 – 1)
= -0.98%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 6.12% + (-8.08%6.12%) × (4 – 1) ÷ (5 – 1)
= -4.53%