Why is CVS Buying $2 Billion of its Stock? (CVS, WAG, RAD)

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CVS Caremark Corp. (NYSE: CVS) has announced that the company will buy back up to $2 Billion worth of common stock from time to time in the open markets during 2008 and 2009.  The company believes this will enhance shareholder returns.

While some buybacks are great, this one seems so odd that it may even be counterintuitive.  The company has been the darling of pharmacy stocks compared to Walgreen Co. (NYSE: WAG), and Rite Aid Corp. (NYSE: RAD) has been left so far behind that it hasn’t ever been able to mount an effective turnaround this entire decade.  It scored a huge win with its acquisition of Caremark Rx to become a huge pharmacy benefit manager.  The stock is also within sniffing distance of its 52-week highs and shares are up close to 200% over the last 5-years.

Is there a significant slowdown happening on the retail side there in pharmacies?  The answer is yes or at least some, but pharmacies have the benefit of being located close to many homes in neighborhoods and they have the benefit that many consumers go there for their pharmaceutical and general healthcare and personal hygiene products.  While people may spend less during hard times, many of those products still have to sell regardless of the economy. These aren’t recession-proof, but they should hold up better than mid-tier purses and mid-tier clothing retailers.

But this could also be a signal from the company that the bulk of its post-merger benefits have been realized.  Unfortunately, we won’t know about that until more time passes.  We don’t want to speculate on whether or not CVS thinks its growth is going to peter out in 2008 and 2009, but the timing of this $2 Billion cushion just seems odd.  This would represent about 3 and a half days worth of trading volume.

Shares of CVS have gained to be up 0.5% at $42.90 today after the news.  Its 52-week trading range is $34.80 to $43.75, and its market cap is roughly $61 Billion.

Jon C. Ogg
May 21, 2008