Idea of the Week: CVS Health - Stable income from a healthcare name, with yields up to 6+%

Data as of 31 March 2026 
Source: Company Data, iFAST Compilations.

Acyclical demand for CVS offerings underpins healthy revenue generation through the cycle

The foundation underpinning CVS credit is that almost nothing it sells is optional. People fill prescriptions and carry health insurance in good economies and bad, which gives CVS a stable, recession-resistant revenue base. The proof is in the record: group revenue has grown every single year, from US$292.1b (FY2021) to US$402.1b (FY2025) — through the pandemic, the sharpest inflation in four decades and one of the most challenging periods the health insurance industry has seen (see chart 2 below). Even in FY2024, when Aetna came under severe pressure, the Health Services and Pharmacy & Consumer Wellness segments held firm, keeping group revenue growth positive at 4.2%.

Volumes (for pharmacy) tell the same story: prescriptions filled climbed from 1,590m (FY2021) to 1,809m (FY2025), driven by an ageing population and chronic disease — demographics, not the economic cycle. And scale protects those volumes: the largest pharmacy network, a top-two PBM, and a top-three insurer all work in tandem to reinforce CVS’ pricing power.

A second layer of protection exists for the group: almost everything CVS sells reprices annually. Insurance premiums and Medicare bids reset annually; PBM contracts reprice on staggered multi-year cycles and retail pharmacy reimbursement is negotiated separately with payers. When costs spike, CVS adjusts prices and exits unprofitable business in the next contract cycle, turning what looks like earnings volatility into a timing issue, not a structural impairment of debt-servicing capacity.

Aetna bore the brunt of an industry-wide medical cost surge from 2023, with the medical benefit ratio deteriorating to a peak of 92.5% (FY2024) and adjusted operating income falling from US$5.6b (FY2023) to US$0.3b — a near-95% decline. Crucially, it never turned negative. CVS responded by repricing Medicare plans, exiting unprofitable counties and shedding approximately 1.1 million lower-margin members, preserving a positive earnings contribution even at the cycle trough.

The recovery is clearly in motion. Aetna's adjusted operating income rebounded to US$2.9b in FY2025, and in 1Q2026 the MBR printed at 84.6% — its best level since before the downturn — with adjusted operating income up 52.6% YoY to US$3.0b. Management guides full-year 2026 Aetna earnings of US$4.00–4.34b and has reaffirmed target Medicare Advantage margins of approximately 3–4% by 2028, with each annual repricing cycle locking in further progress.

Looking ahead, ageing demographics, growing drug volumes (including GLP-1s) and a supportive 2027 Medicare rate notice underpin continued mid-single-digit revenue growth, with FY2026 guided to at least US$405b. Hence, we remain comfortable with the group’s ability to sustain healthy revenue generation.

Chart 2: Steadily increasing revenue through cycle 

Data as of 31 March 2026 
Source: Company Data, iFAST Compilations. 

Three earnings engines provide a substantial earnings floor for CVS

The last five years delivered a live stress test of CVS’ diversification — and the model passed. As seen in Chart 3 below, when surging medical costs crushed Aetna's adjusted operating income from US$5.6b (FY2023) to just US$0.3b (FY2024), the other two engines barely flinched: Health Services earned US$7.2b (its five-year range is a remarkably tight US$6.5–7.4b) and retail pharmacy contributed US$5.8b (range US$5.8–7.3b). Combined segment earnings troughed at ~US$13.3b — down from a US$20.2b peak but still covering the group's ~US$3.0b annual interest bill more than four times at the very bottom of the cycle. That is the earnings floor that defines the resilience of CVS’ credit profile.

1Q2026 showed the rotation working in reverse: Aetna's earnings jumped 52.6% while the two pharmacy businesses absorbed pricing pressure, and the group still grew adjusted operating income 12.5%. Over the past five years, we have seen this pattern playing out consistently: Aetna is the only one of the three engines that takes underwriting risk – pricing premiums a year in advance and absorbing the hit when medical costs surprise – which is why it is the only one capable of a sudden collapse. The two pharmacy businesses earn volume-based economics on close to 2 billion prescriptions and claims a year; their prices are negotiated annually and arrive gradually, not as shocks. Better still, we highlight that the engines partially hedge each other: the surge in doctor visits that crushed Aetna’s margins in FY2024 generated more prescriptions for Caremark to process and CVS pharmacies to fill. In our view, the three segments have low earnings correlation with one another, providing a well-diversified earnings floor, which brings comfort to bondholders.

Looking ahead, management’s FY2026 guidance implies combined earnings of roughly US$17.4–17.8b — a big step up from the FY2024 trough, led by Aetna's recovery, with a multi-year runway to normal margins (3-5%) by 2028. Pressure in the two pharmacy segments is real but gradual and annually negotiated. The main risk would be medical costs re-accelerating just as PBM regulation bites — a tail scenario, in our view, not a base case. Consequently, we expect the earnings floor to keep rising from here.

Chart 3: Adjusted operating income by segment (FY2021 – FY2025) 

Data as of 31 March 2026 
Source: Company Data, iFAST Compilations. 

Improving credit profile with increasing coverage

Over the last five years, CVS’ credit profile is largely shaped by its US$18.6b acquisitions of Oak Street Health (2023) and Signify Health (2022), alongside smaller tuck-ins. Encouragingly, see chart 4 below: since the peak of US$82.9b in total debt in FY2024, the healthcare group has been shoring up its balance sheet. Share buybacks have been suspended, the dividend held flat since early 2024, and management is prioritising the reduction of CVS’ debt. As bondholders, we view management’s actions and commitment to preserve the group’s investment-grade status as credible and positive.

Liquidity is decent: as of 31 March 2026, CVS held US$11.8b of cash and short-term investments, plus US$7.5b of committed, undrawn bank credit lines, yielding a total available liquidity of ~US$19.3b. Liquidity for the group is further bolstered by consistent, healthy operating cash and free cash flow generation (see chart 5 below), which has averaged US$13.5b and US$7.2b, respectively, over the past five years. Meanwhile, total debt (including lease liabilities) stands at US$78.3b, with US$2.6b due within a year. Given CVS’ healthy liquidity position, we do not foresee any near-term financing pressure.

Looking at Table 1 below, we see a general improving trend for CVS’ leverage (measured via net debt-to-equity) since its FY2024 peak, corresponding to the completion of its large acquisitions as mentioned earlier. This metric was 0.86x as of 31 March 2026 — the lowest since FY2022 — and the five-year path tells the story (see Table 1): 0.85x (FY2021), 0.77x (FY2022), then up to 0.89x (FY2023) on the Oak Street/Signify deals and a 0.95x peak (FY2024) as Aetna's downturn ate into equity, before unwinding to 0.92x (FY2025) and 0.86x now. Furthermore, we highlight how this metric has stayed below 1.0x even through the period of large acquisitions, and we are comfortable with CVS’ current leverage profile.

A complementary lens on leverage is Debt/EBITDA, which management flagged on the 1Q2026 earnings call as the key metric gating any resumption of share buybacks. The ratio peaked at 4.9x in FY2022 and again in FY2024 — the latter reflecting the collapse in Aetna's EBITDA rather than any increase in debt — before improving to 4.1x in FY2025 and 4.4x on a TTM basis as of 1Q2026. The slight TTM uptick is a function of the trailing window still capturing FY2024's depressed earnings; as Aetna's recovery flows through the full-year numbers, we expect the ratio to trend materially lower through FY2026–2027. Management has been explicit that buybacks remain off the table until leverage improves to a level consistent with the group's investment-grade commitment — which brings comfort to bondholders.

Interest coverage (EBITDA / annual interest expense) has ranged from 5.7x to 8.8x over FY2021–FY2025 and currently stands at ~5.7x on a trailing twelve-month (TTM) basis. The swings have come almost entirely from earnings (the insurance cycle and write-downs) rather than the interest bill, which has crept up only slowly and is now capped by the debt-reduction policy — 1Q2026 interest expense was already down YoY. Even at the trough, we think CVS remains in a comfortable position to service its interest obligations.

Chart 4: Total debt has peaked in FY24 

Data as of 31 March 2026 
Source: Company Data, iFAST Compilations. 

Chart 5: Healthy cash generation across the last five years

Data as of 31 March 2026 
Source: Company Data, iFAST Compilations. 

Table 1: Key credit metrics (FY2021–1Q2026)

Overall, we think CVS has a stable and improving low investment-grade profile, being rated BBB (S&P), Baa3 (Moody’s) and BBB (Fitch). The group’s diversified, non-discretionary healthcare mix has supported positive earnings and cash generation across the cycle, even through the challenging downturn in the healthcare insurance industry. Looking ahead, we believe the continued recovery of Aetna’s margins, combined with management’s proven commitment to sustain the group’s credit profile – suspended buybacks, dividends held flat and ongoing debt reduction – stabilises CVS’ credit profile, while offering a modest scope of improvement moving forward.

That said, we highlight the key risks involved, mostly regulatory in nature. CVS sits at the intersection of three heavily regulated industries: PBM reform could compress Caremark's economics, government reimbursement rates drive both retail pharmacy margins and Aetna's Medicare business, and drug pricing policy – including potential pharmaceutical tariffs – adds further uncertainty. Beyond regulation, medical costs could re-accelerate before Aetna's recovery is complete. Against this, bondholders have meaningful cushions: demand for prescriptions and health insurance does not fall in a recession, most of what CVS sells reprices annually – allowing cost shocks and regulatory changes to be absorbed within one to two contract cycles – and liquidity of ~US$19.3b covers near-term maturities more than seven times over.

In Table 2 above, we highlight CVS’ outstanding USD bonds on offer. In general, these issues offer yields-to-worst ranging from 4.59% to 6.14%, with tenors across shorter, medium, and long timeframes. Against comparable US Treasuries, these bonds offer a decent yield spread of 30+ bps to 115+bps. As seen in the Bloomberg chart below, we find these CVS bonds to be fairly priced.

Investors seeking stable income from an issuer whose earnings are anchored by non-discretionary healthcare demand, and whose credit profile is firmly on the mend, can consider these CVS bonds. Finally, we emphasise the duration risk embedded in its 2053 bonds, which could face steep price declines if interest rates rise further.