CVS Caremark (CVS) recently announced cash tender offers for its two-part offering of senior notes. It priced the 6.60% senior notes due 2019 for the aggregate principal amount of $1 billion as well as up to a maximum of 6.125% senior notes due 2016 and 5.750% senior notes due 2017 for the aggregate principal amount of $0.7 billion and $1.75 billion, respectively.
Barclays Capital, a division of Barclays (BCS) and U.S. Bancorp Investment under U.S. Bancorp (USB) are the dealer managers for the senior note offering. D.F. King & Co. will act as the tender and information agent.
According to CVS Caremark, the total proceeds from this offering will be utilized to redeem a part of the company's outstanding debt. CVS Caremark exited third quarter 2012 with long-term debt of $9.2 billion.
The senior note offering will enable CVS Caremark to wend a part of its debt at lower rates. As a result, the company will reduce its interest expense going forward, benefiting from the current favorable interest rate environment. The interest expense for CVS Caremark was $135 million in the most recent quarter compared with $155 million in the year-ago quarter. Further reduction in interest expense should improve the company's bottom line.
CVS Caremark has a strong balance sheet. It does not rely on capital markets to drive growth. CVS Caremark's cash flow from operations guidance for 2012 remains at $6.2-$6.4 billion. The company expects to generate free cash flow of $4.6-$4.9 billion in 2012 with potential for further growth. Thus far, the company's growth generated sufficient liquidity to support operations and maintain capital.
In 3Q12, CVS Caremark had a debt-to-capital ratio of 19.97% compared with peers' mean of 32.78%. The company's debt-to-equity ratio of 24.95% is also lower vis-à-vis peers' mean of 39.09%. The comparison of these financial ratios with the average of its closest peers reflects the solid financial strength of CVS Caremark. We think that the company has sufficient financial leverage to stay afloat.
We currently have a 'Neutral' recommendation on CVS Caremark. The stock carries a Zacks #3 Rank which translates into a short-term Hold rating.