CVS Health Corp. (NYSE:CVS)

The period under review demonstrates fluctuating financial performance as measured by economic profit. Net operating profit after taxes (NOPAT) exhibited volatility, beginning at US$9,067 million in 2020, increasing to US$9,170 million in 2021, then declining significantly to US$3,871 million in 2022, before recovering to US$9,523 million in 2023 and subsequently decreasing to US$5,319 million in 2024.

Cost of Capital

The cost of capital increased from 7.01% in 2020 to 8.04% in 2021 and peaked at 8.16% in 2022. It then decreased to 7.63% in 2023 and further to 7.37% in 2024, suggesting a potential easing of financing costs towards the end of the period.

Invested Capital

Invested capital generally decreased from US$136,669 million in 2020 to US$123,703 million in 2022. A subsequent increase was observed in 2023, reaching US$134,694 million, followed by a slight decrease to US$131,642 million in 2024. These fluctuations may reflect changes in capital expenditure, asset sales, or other investment decisions.

Economic Profit

Economic profit was negative throughout the entire period, indicating that the company’s returns did not exceed its cost of capital. The negative economic profit widened considerably from -US$509 million in 2020 to -US$6,222 million in 2022, representing the most substantial shortfall. While economic profit improved to -US$760 million in 2023, it deteriorated again to -US$4,384 million in 2024. This consistent negative economic profit suggests a need to evaluate capital allocation strategies and operational efficiency to improve returns relative to the cost of capital.

The interplay between NOPAT, cost of capital, and invested capital significantly influenced the economic profit. The substantial decline in NOPAT in 2022, coupled with a relatively high cost of capital, contributed to the largest negative economic profit during that year. While NOPAT recovered in 2023, the continued negative economic profit in both 2023 and 2024 indicates that improvements in NOPAT have not been sufficient to offset the cost of capital applied to the invested capital base.

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 deterioration through 2022 before showing improvement in subsequent years, though remaining negative overall. This movement correlates with changes in economic profit and invested capital.

Economic Spread Ratio Trend

In 2020, the economic spread ratio was -0.37%. This worsened substantially to -1.04% in 2021, and then to -5.03% in 2022, indicating a widening gap between the return on invested capital and the cost of capital. A notable improvement occurred in 2023, with the ratio increasing to -0.56%. However, this positive trend was not sustained, as the ratio decreased again to -3.33% in 2024.

The economic spread ratio’s movement appears closely tied to the fluctuations in economic profit. The largest decline in the ratio coincided with the largest absolute value of economic profit loss in 2022. While economic profit remained negative throughout the period, the magnitude of the loss influenced the ratio’s value.

Relationship with Economic Profit

The economic spread ratio is calculated using economic profit and invested capital. The substantial negative economic profit figures in 2021, 2022, 2023, and 2024 directly contributed to the negative economic spread ratios observed during those years. The most significant negative economic profit occurred in 2022, resulting in the most negative economic spread ratio for the analyzed period.

Invested capital decreased from 2020 to 2022, then increased in 2023 and decreased slightly in 2024. While changes in invested capital influenced the overall ratio, the dominant driver of the observed trends was the performance of economic profit.

Invested Capital Considerations

Invested capital decreased from US$136,669 million in 2020 to US$123,703 million in 2022. This decrease was then partially offset by an increase to US$134,694 million in 2023, followed by a slight decrease to US$131,642 million in 2024. The changes in invested capital, while present, were less dramatic than the fluctuations in economic profit and appear to have had a secondary effect on the economic spread ratio.

Overall, the economic spread ratio indicates that the company’s returns on invested capital have consistently fallen short of its cost of capital during the analyzed period. The ratio’s volatility suggests instability in generating returns sufficient to cover capital costs.

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

Economic Profit Margin

In 2020, the economic profit margin stood at -0.19%. This indicates that for every dollar of revenue, the company generated 0.19 cents less than its cost of capital. The margin worsened considerably in 2021, reaching -0.47%, suggesting a further decline in value creation relative to capital employed.

2022 witnessed a substantial decrease, with the economic profit margin falling to -1.93%. This represents the most significant negative margin observed during the analyzed period, indicating a substantial shortfall in returns compared to the cost of capital.

A notable improvement occurred in 2023, with the economic profit margin increasing to -0.21%. While still negative, this represents a significant recovery from the prior year’s low. This suggests that the company began to improve its ability to generate returns exceeding its cost of capital, albeit modestly.

The economic profit margin continued to improve in 2024, reaching -1.18%. This indicates a continued, though incomplete, recovery in value creation. Despite the improvement, the margin remained negative, signifying that the company’s returns still did not fully cover its cost of capital.

The trend in economic profit margin closely mirrors the trend in economic profit. The substantial decline in economic profit from 2020 to 2022 directly corresponds to the worsening economic profit margin. The subsequent improvements in economic profit in 2023 and 2024 are reflected in the corresponding increases in the economic profit margin. Revenues from customers increased consistently throughout the period, however, this revenue growth was not sufficient to offset the increases in the cost of capital, particularly in 2022.

Overall, the period under review demonstrates a challenging environment for value creation. While improvements were observed in the later years, the company consistently failed to generate economic profits, as evidenced by the persistently negative economic profit margin.