Once upon a time, this stock was a powerful dividend-growth machine. In fact, since it split its shares 2 for 1 back in 2005, its quarterly dividends have grown nearly 14 times.

This breakneck pace has resulted in today’s 3.2% yield, up from the sub-1% yield the stock sported 13 years ago. The days of dividend growth may be over for now, but I’m OK with that. Let me explain…

CVS Health (NYSE: CVS) has, indeed, been good to its shareholders. That’s because, in an extremely challenging retail and health-care environment, this company has never stopped innovating and transforming itself.

#-ad_banner-#CVS is a force in the industry. It managed to not only stay alive when others faltered, but it remained relevant and grew. Investors who recognized the future of CVS back in December 2005 would have tripled their money (with dividends included). During that period, CVS returned 200%, or 9.5% annualized as of the end of February 2018, better than the S&P 500’s total return of 179% or 8.8% annualized over the same period.

And that’s despite the fact that over the last five years its share price has been pretty much running in place.

The fact that CVS shares didn’t appreciate, despite the steady growth in revenue and profits over the past several years, makes them attractive for any value-seeking investor.

Healthcare’s Most Innovative Company
The main reason CVS sells at a single-digit P/E is the risk the markets assign to its groundbreaking — and some may say risky — bid for insurer Aetna (NYSE: AET).

On December 3, CVS announced that it had reached an agreement to buy Aetna, a leading healthcare benefits company that serves more than 22 million people, for approximately $69 billion. If all goes well, the deal will be completed by year-end. With the assumption of Aetna debt, the total transaction value is $77 billion.

This is a bold move. There has been no company in the United States that combines the power of a drugstore distribution network, a PBM (pharmacy benefit manager) and a health insurance company — but if anyone could pull it off, CVS could. That’s because CVS is a healthcare company with a deep-rooted history of innovation, and it has the experience of acquiring large companies and incorporating their businesses into its own.

Prospective investors should recall that this company, formerly simply a drugstore retailer, already has several transformative acquisitions under its belt. Back in 2006, CVS, then the second-biggest drugstore chain in the country after Walgreens (NYSE: WBA), acquired Caremark, the leading pharmacy benefits manager in the United States, for about $21 billion.

This acquisition fully transformed CVS as it added the fulfillment of prescriptions on behalf of major insurers and employers to its retail business, creating significant advantages over its competitors. The Caremark acquisition had also served as the foundation for the profit growth and share-price outperformance I discussed earlier.

And if this weren’t enough, in 2016, CVS bought Omnicare, a pharmacy services provider specializing in prescription drug distribution to nursing homes and assisted living facilities. The price tag for that acquisition: $12.7 billion, including debt.

But let’s get back to the future — the prospective Aetna acquisition. Clearly, it’s the largest one in the history of CVS. But that doesn’t necessarily mean it’s the riskiest.

The inevitable regulatory concerns aside (it still needs to be approved by the Department of Justice, and antitrust concerns have been raised by some consumer advocates), the merger should benefit CVS shareholders. The two companies have been close partners for most of the past decade, and they share a vision that pharmacy care can play a critical role in quality healthcare while lowering total costs. If the acquisition does not get regulators’ approval, CVS would have to roll back (buy back) much of the debt it has issued, a risk it is willing to take.

CVS has already borrowed the $40 billion necessary to finance its Aetna purchase — the largest U.S. corporate bond sale in more than two years. The timing was quite good — the company sold its bonds in early March, ahead of the Fed decision to raise rates, and because of its strong credit rating profile, it was able to get relatively attractive yields on its debt.

CVS Without Aetna: Still A Buy
Even if for some reason the merger fails to pan out, CVS is attractive because of its unique business model, strong management team, and excellent execution — not to mention the fact that its shares offer excellent value, which is rare in today’s market.

The Aetna acquisition, if it happens, will simply add to the attractiveness of the company and enhance the new, combined company’s growth prospects.

On the flipside, the newly-created company will have much more debt. That’s understandable, given the sheer size of the acquisition. What truly matters is whether or not this debt will be manageable, and also how fast CVS plans to wind it down.

Compared with the current 2.25 times debt-to-EBITDA (earnings before income taxes, depreciation and amortization) ratio, the expected 4.6 times leverage is quite high. However, in two years after the acquisition closes, the combined company expects to wind down this leverage, to the mid-3 range. A longer-term goal is to lower the debt levels even further (although it will still be above the current level of leverage).

These are admirable goals — high-debt companies are much more difficult to manage (and to own) long-term.

I would like to see the acquisition go through because I think shareholders would benefit the most in that case. But at current levels, I like CVS even without Aetna.

However, I don’t expect CVS to raise its current $0.50 per share quarterly dividend any time soon. Because of the debt the company’s taken on to finance its future growth, it now plans to suspend the company’s share repurchase program, forego any large-scale merger and acquisition activity and also keep the dividend at its current level. (All this is contingent on the merger going through.)

However, at the current valuation and 3.2% yield, I’m happy with this plan.

Value And Income — What’s Not To Like?
This reliable, market-beating yield means that CVS belongs in the “steady income generators” section of my Daily Paycheck portfolio. The other stocks in this segment of my portfolio yield an average of 4.8% — through any market conditions imaginable. In total, the segment has given off an average total return of 24.7% per year.

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