January 4, 2018 / 12:38 PM / in 2 years

CVS Health expects tax overhaul to boost cash flow, shares rise

(Reuters) - CVS Health Corp (CVS.N) said on Thursday it expects the recent tax reform to boost its cash flow by about $1.2 billion, sending its shares up nearly 5 percent in afternoon trading.

FINAL PHOTO: A logo of CVS Health is displayed on a monitor above the floor of the New York Stock Exchange shortly after the opening bell in New York, U.S., December 5, 2017. REUTERS/Lucas Jackson

CVS Health said it expects its tax rate to be about 27 percent in 2018, and that it would use the finances to invest in growing its business after it completes its purchase of Aetna Inc AET.N.

The company said last month it would buy health insurer Aetna for $69 billion to tackle soaring healthcare spending through lower-cost medical services in pharmacies. It then suspended its share buyback program to fund the deal.

The company on Thursday forecast fourth-quarter adjusted earnings per share at the lower end of its previous outlook of $1.88-$1.92 as it suspended its share buyback program.

CVS Health said its plan to cancel share buybacks has eroded about 340-610 basis points of growth in its annual adjusted earnings per share.

It also forecast its full-year net revenue to grow 0.75 percent-2.5 percent in 2018, helped by strong growth in scripts and claims.

The range, however, came below analysts’ estimates of 3.9 percent-4.4 percent, according to Leerink Research.

The company also expects to see the lowest level of year-over-year enterprise operating profit growth in the first quarter of 2018, CVS Health’s CFO David Denton said on a conference call.

Retail operating profit would contract in the first quarter as the company would incur costs associated with investments made to grow the business, he said, adding that the number would improve as the year progresses.

The guidance is operationally disappointing but is somewhat explainable with a couple of one-time payments negatively impacting the company’s spending, Needham analyst Kevin Caliendo told Reuters.

Analysts believe that the benefit CVS Health expects to gain from the tax overhaul is driving its stock up.

Shares of the No. 2 U.S. drug store chain spiked as much as 4.7 percent to $76.67 in afternoon trading.

“The 27 percent number versus the current tax rate of 39 percent is a material positive,” Caliendo said.

Rival Walgreens Boots Alliance Inc (WBA.O) reported weak quarterly retail sales on Thursday, but declined to provide an update on the tax code revamp. Walgreens’ shares were trading down 4.7 percent at $71.95.

Reporting by Divya Grover in Bengaluru; Editing by Martina D'Couto

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