CVS Health Corp. (NYSE:CVS)

The period under review demonstrates significant fluctuations in economic profit. Net operating profit after taxes (NOPAT) exhibited volatility, beginning at US$9,067 million, decreasing substantially to US$3,871 million, then recovering to US$9,523 million before declining again to US$5,319 million. Concurrently, the cost of capital increased from 7.67% to 9.01% over the first three years, then decreased to 8.05%. Invested capital also showed variability, initially decreasing from US$136,669 million to US$123,703 million, and then increasing to US$134,694 million before settling at US$131,642 million.

Economic Profit Trend

Economic profit consistently remained negative throughout the observed period. The largest negative economic profit occurred in 2022, reaching US$-7,279 million. While the negative economic profit lessened in 2021 compared to 2020 (from US$-1,412 million to US$-2,453 million), it worsened considerably in 2022. A reduction in the magnitude of the loss was observed in 2023 (US$-1,770 million), but the economic profit again became more negative in 2024 (US$-5,284 million).

Relationship between NOPAT and Economic Profit

The fluctuations in NOPAT appear to strongly correlate with the changes in economic profit. The substantial decline in NOPAT in 2022 directly contributed to the largest negative economic profit for that year. The recovery in NOPAT in 2023 partially offset the negative economic profit, but the subsequent decline in NOPAT in 2024 resulted in a larger negative economic profit compared to 2023.

Impact of Cost of Capital

The increasing cost of capital from 2020 to 2022 likely exacerbated the negative economic profit during those years. Although the cost of capital decreased in 2023 and 2024, it remained elevated enough to prevent economic profit from turning positive, even with the NOPAT recovery in 2023. The interplay between NOPAT and the cost of capital is a key driver of the observed economic profit performance.

Invested Capital Considerations

Changes in invested capital appear to have a less direct impact on economic profit compared to NOPAT and cost of capital. While invested capital decreased during the period of increasing cost of capital, the overall negative economic profit trend suggests that the primary driver was insufficient NOPAT relative to the capital employed.

Net income attributable to CVS Health

The net income exhibited fluctuations over the five-year period. Starting at $7,179 million in 2020, there was an increase to $7,910 million in 2021, indicating growth. However, in 2022, net income notably declined to $4,149 million, reflecting a significant drop. This was followed by a rebound in 2023, reaching $8,344 million, which represents the highest point in the period. In 2024, net income once again decreased to $4,614 million, showing volatility and an overall irregular pattern in earnings.

Net operating profit after taxes (NOPAT)

NOPAT followed a pattern broadly similar to net income but with less pronounced volatility. It began at $9,067 million in 2020 and slightly increased to $9,170 million in 2021. In 2022, there was a sharp decline to $3,871 million, mirroring the net income decline of that year. The subsequent year, 2023, saw a recovery to $9,523 million, the highest level observed in this timeframe. By 2024, NOPAT decreased again to $5,319 million. This trend suggests that while operating profitability is subject to cyclical pressures, it remains relatively strong when it rebounds.

Insights

The data reveals substantial volatility in both net income and NOPAT with synchronous fluctuations particularly pronounced in 2022 and 2024. These troughs could indicate periods of operational or market challenges impacting profitability. Despite these downturns, the company demonstrated resilience with robust recoveries in 2023, suggesting effective management responses or favorable market conditions during that year. The gap between net income and NOPAT levels also suggests that non-operating factors or tax impacts may play a role in overall profitability fluctuations. The irregular pattern underscores the importance of closely monitoring operational efficiency and external factors influencing financial performance.

Income Tax Provision

The income tax provision exhibited a fluctuating trend over the years observed. It decreased from $2,569 million in 2020 to $2,522 million in 2021, indicating a slight reduction. This was followed by a more significant decline to $1,463 million in 2022. However, in 2023, the provision increased sharply to $2,805 million, before decreasing again to $1,562 million in 2024. Overall, the income tax provision shows variability with notable peaks and troughs during the five-year period.

Cash Operating Taxes

Cash operating taxes showed a moderate decline from $3,769 million in 2020 to $3,407 million in 2021. In 2022, there was an increase to $4,013 million, marking the highest point in the period reviewed. Subsequently, the amount slightly decreased to $3,965 million in 2023, followed by a significant drop to $2,464 million in 2024. This pattern indicates some volatility with an overall downward movement towards the end of the period.

Comparative Insights

Both income tax provision and cash operating taxes demonstrate considerable year-to-year fluctuations. Cash operating taxes consistently remained higher than the income tax provision across all years. The disparity between the two measures also varied, with the smallest gap occurring in 2024. This suggests possible changes in tax planning, timing differences, or cash tax payments relative to accounting tax expense over the evaluated periods.

Total reported debt & leases

The total reported debt and leases decreased from 85,042 million US dollars at the end of 2020 to 70,732 million US dollars by the end of 2022. This decline indicates a reduction in leverage during this period. However, starting from 2023, there is a notable increase, rising to 79,385 million US dollars and further to 82,920 million US dollars by the end of 2024, suggesting renewed borrowing or leasing commitments.

Total CVS Health shareholders’ equity

Shareholders’ equity showed a rising trend from 69,389 million US dollars in 2020, peaking at 75,075 million in 2021. Following this peak, equity experienced a slight pullback to 71,015 million in 2022 but recovered to 76,461 million in 2023. By 2024, it marginally declined again to 75,560 million US dollars. Overall, equity levels remained relatively stable with moderate fluctuations around the mid-70 billion range in the most recent years.

Invested capital

Invested capital declined steadily from 136,669 million US dollars in 2020 to 123,703 million in 2022, reflecting overall reductions in capital employed. This trend reversed in 2023 with an increase to 134,694 million followed by a slight decrease to 131,642 million in 2024. The pattern suggests a cycle of divestments or asset optimization up to 2022 and subsequent reinvestment or capital expansion over the following years, indicating adjustments in capital structure or operational focus.

The economic spread ratio exhibited considerable fluctuation between 2020 and 2024. Initially negative, the ratio demonstrated a significant decline through 2022 before partially recovering in subsequent periods, though remaining negative throughout the analyzed timeframe. Economic profit consistently registered as a negative value across all years, indicating the company’s returns did not exceed its cost of capital.

Economic Spread Ratio

The economic spread ratio decreased from -1.03% in 2020 to -1.87% in 2021, suggesting a widening gap between the company’s return on invested capital and its cost of capital. This trend accelerated substantially in 2022, with the ratio reaching -5.88%, representing the largest negative spread observed during the period. A notable improvement occurred in 2023, with the ratio moving to -1.31%, indicating a lessening of the negative spread. However, this improvement was not sustained, as the ratio decreased again to -4.01% in 2024, though still less severe than the 2022 value.

Economic Profit

Economic profit moved from negative US$1,412 million in 2020 to negative US$2,453 million in 2021, mirroring the worsening economic spread. The largest negative economic profit was recorded in 2022 at negative US$7,279 million, aligning with the most substantial negative economic spread. A reduction in the magnitude of the loss was seen in 2023, with economic profit at negative US$1,770 million. The economic profit then increased in absolute value to negative US$5,284 million in 2024.

Invested Capital

Invested capital decreased from US$136,669 million in 2020 to US$130,882 million in 2021, and continued to decline to US$123,703 million in 2022. A subsequent increase was observed in 2023, reaching US$134,694 million, before decreasing slightly to US$131,642 million in 2024. While invested capital fluctuated, it did not exhibit the same degree of volatility as the economic spread ratio or economic profit.

The interplay between economic profit and invested capital suggests that while the company adjusted its capital base, it consistently failed to generate returns exceeding its cost of capital, as evidenced by the persistent negative economic spread ratio. The substantial decline in the economic spread ratio in 2022 warrants further investigation to understand the underlying drivers of this performance.

The economic profit margin exhibited considerable fluctuation between 2020 and 2024. Initially negative, the margin deteriorated significantly over the period before showing some signs of stabilization, though remaining negative overall. A detailed examination of the trends is presented below.

Economic Profit Margin Trend

In 2020, the economic profit margin stood at -0.53%. This figure worsened substantially in 2021, reaching -0.84%, and continued its downward trajectory in 2022, declining to -2.26%. A notable improvement occurred in 2023, with the margin increasing to -0.50%. However, this positive shift was not sustained, as the margin decreased again in 2024 to -1.43%.

Relationship to Revenues

Revenues from customers demonstrated consistent growth throughout the five-year period, increasing from US$267,908 million in 2020 to US$370,656 million in 2024. Despite this revenue growth, the economic profit margin remained negative across all years, indicating that the company’s returns did not exceed its cost of capital. The largest revenue increase occurred between 2022 and 2023 (US$35.0 billion), coinciding with a significant, though temporary, improvement in the economic profit margin.

Economic Profit

The absolute value of economic profit also fluctuated. It increased from a loss of US$1,412 million in 2020 to a loss of US$2,453 million in 2021. The largest loss was recorded in 2022 at US$7,279 million. The loss decreased to US$1,770 million in 2023, but increased again to US$5,284 million in 2024. This pattern mirrors the trend observed in the economic profit margin, suggesting a strong correlation between the two metrics.

The observed trends suggest that while the company has been successful in growing revenues, it has struggled to generate economic profits. The widening gap between revenues and economic profit, particularly in 2022, warrants further investigation into the factors contributing to the cost of capital exceeding returns.