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CVS, Goodwill, and Enterprise Value

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CVS, Goodwill, and Enterprise Value
Friday, March 8, 2019

CVS Health filed its 2018 financial statements on Feb. 28, and one fact almost screamed at us from the balance sheet — CVS has a huge amount of value tied up in its goodwill and intangible assets.

As you can see from Figure 1, below, the firm specifically has $115.2 billion reported for goodwill and intangible assets. That’s (checking calculator…) 58.6 percent of total assets, tied up in items that don’t actually exist here on the material plane.



To be sure, some of those items do create value for CVS. Intangibles, for example, must include copyrights, patents, and other agreements that generate revenue for the firm. Still, some of that value is also tied up in, say, the brand value of the CVS trademark. Let’s recall that Kraft-Heinz also placed a lot of worth on the intangible value of its Kraft and Oscar Mayer brands, right until the company took a $8.3 billion impairment charge against them last month.(Plus another $7.1 billion impairment against goodwill.)

Then there is CVS’ $78.7 billion in goodwill, which alone amounts to 40 percent of the company’s total assets. That’s more than double the goodwill CVS reported in 2017, because CVS merged with Aetna last year. So lots of the goodwill number is the result of a gigantic merger, and we all know how those deals tend to fall short of expectations.

Perhaps most alarming, however, is the number at the bottom of the balance sheet: total shareholder equity is $58.5 billion, roughly half the value of the company’s goodwill and intangibles. So if CVS-Aetna fails to live up to its promise and the company announces a gigantic write-down some day (see Kraft-Heinz, above), that impairment could leave shareholders wiped out.

Bigger Picture

The CVS example got us curious: what is a normal level of intangibles and goodwill tied up on the balance sheet, anyway? So we looked at what the S&P 500 collectively reported for goodwill and intangible assets, compared to total assets, for 2013 to 2017. (We don’t have quite enough 2018 reports yet to include last year.)

Then we expressed that ratio as a percentage, and got this chart, below.



So those items are rising as a portion of total firm value, from 9.37 percent in 2013 to 12.66 percent in 2017 — but CVS is still way, way above the norm.

Just food for thought while you’re waiting to fill your next prescription.


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