Capital asset pricing model, company valuation, CVS Health, expected return, free cash flow, weighted average cost of capital


CVS Health Corporation owns the retail pharmacy chain and also owns CVS Caremark, the pharmacy benefits manager, and the Aetna health insurance provider (Kolakowski, 2023). Recent acquisitions in 2022 and 2023 include Oak Street Health, Inc., and Signify Health. CVS’s proactive growth strategy aims to acquire health care firms across various sectors of health care, yet the management is not averse to divesting the firm of less profitable subsidiaries. In November 2021 the firm announced the closing of 300 stores per year through 2024. A decline in stock price of CVS would suggest analyzing whether the company is still a good long-term investment. A deeper study may be warranted, but seven methods should suffice to either reject CVS immediately or accept CVS for further consideration. The analysis includes the following:

The price-to-earnings ratio or P/E multiple approach for validating stock price.

Evaluating expected return of the stock with the capital asset pricing model (CAPM).

The corporate valuation model using free cash flows for stock-price valuation.

A review of the company’s dividend history.

Comparison of the company’s capital structure with its peers.

Evaluating the company’s historical stock prices.

Review of the recent financial statements and the five categories of financial ratios to determine the overall health of the firm.

As a company with a large retail business unit, CVS stock would be considered a moderately conservative investment. A decision on long-term investing in CVS stock would consider the risk and potential returns. Subject to further scrutiny, this study accepts CVS as a potential investment choice. Although the acceptance is based on analysis, the author makes no guarantee of future results. This paper is the original work of the author and is not previously published.

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