CVS Health Stock Is Soaring. Could the Rally Just Be Getting Started?

CVS Health (NYSE: CVS) may just have the prescription for your investing needs if you're looking for long-term growth. The shares of the nation's largest pharmacy chain had been overlooked until recently, because of the company's thin margins and relatively slow growth.

However, over the past month, CVS stock has risen by around 24%. That's thanks to a strong first-quarter earnings report, a turnaround in its worst-performing segment, and subsequent analyst upgrades.

Here are three reasons why the rally for this healthcare company may have some legs, and one reason to still be cautious.

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Earnings and guidance have improved

In the first quarter, reported revenue jumped 6.2% year over year to $100.4 billion, while earnings per share (EPS) were $2.30, up 62% over the same period a year ago. Both numbers surprised analysts, who had predicted revenue of $94.4 billion and EPS of $1.93.

The upbeat report led the company to raise its full-year guidance. EPS is now predicted to be between $6.24 and $6.44, up 4.9% at the midpoint, and adjusted EPS is expected to be between $7.30 and $7.50, up 4.2% at the midpoint. The company also said it now expects cash flow from operations to be at least $9.5 billion, up from $9 billion.

The dividend yield is still quite attractive

CVS offers a dividend, at its current share price, of around 2.8%, more than double the average dividend of the S&P 500. The company's consistently high free cash flow allows it to maintain its payouts. In recent fiscal years, CVS has generated operating cash flow hovering between $9 billion and $10.5 billion.

Its insurance segment is bouncing back

CVS is a one-stop shop for medical needs. It's a pharmacy company, but it also offers healthcare insurance through its ownership of Aetna, and it's a pharmacy benefits manager through its ownership of Caremark. The three businesses give the company a vertically integrated healthcare ecosystem.

This loop creates a defensive moat that pure-play retailers (such as Walgreens) and pure-play insurers (such as Humana) cannot easily replicate, positioning CVS to capture margins at multiple points of the healthcare value chain.

The health care benefits segment, which includes Aetna, saw revenue rise 3.3% year over year to $35.9 billion.

The rising medical utilization costs in the Aetna health insurance unit have been curbed, allowing better margins. Aetna's medical benefit ratio (MBR) -- the percentage of premiums spent on medical claims -- dropped sharply to 84.6% from 87.3% in the prior year's quarter. Those profits were helped by CVS' decision to exit money-losing Affordable Care Act individual exchanges in 2026, sacrificing low-margin membership volume to rescue its overall insurance profitability.

Its other two segments also saw revenue rise. The pharmacy and consumer wellness segment reported a slight increase in revenue as CVS expanded its prescription volumes, bolstered in part by asset acquisitions from the ongoing closure of Rite Aid stores. The health services segment, which includes Caremark, reported revenue of $48.2 billion, up 11% from the same quarter a year ago.

There is one concern, though

While CVS appears to be improving profitability, one concern is that its debt remains a drag on performance. The capital-intensive strategy of acquiring massive health networks has left it saddled with a formidable mountain of leverage. Total long-term debt was $86.4 billion as of the first quarter, meaning the company is spending money on interest that it could otherwise use for expansion or stock buybacks.

However, it is reducing its total debt, which fell 1.5% year over year to $175 billion. CVS Health appears to have found a way to strengthen its margins in the long term. Analysts are now pointing to an average price target of $101.58; ultimately, the stock appears to have room to climb.

James Halley has positions in CVS Health. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.