CVS pledges to reinvest much of its tax savings, shares fall

(Reuters) - CVS Health Corp CVS.N warned on Thursday that its operating profit could fall this year as it plans to spend most of its $1.2 billion savings from the new U.S. tax law on reducing debt and paying employees more rather than boosting short-term profit.

Shares of the drugstore chain and pharmacy benefits manager fell almost 3 percent on the New York Stock Exchange.

CVS, which is in the process of buying health insurer Aetna Inc AET.N for $69 billion, said it now expects full-year adjusted consolidated operating profit to range from an increase of 1.5 percent over last year to a decline of 1.5 percent. That is more pessimistic that its previous estimate of growth ranging from 1 percent to 4 percent.

“The disappointment here is that much of the tax reform benefit on earnings is essentially going away, so near-term it’s not going to provide as much lift to earnings as people were modeling,” said Oppenheimer & Co analyst Mohan Naidu.

Using its tax savings, CVS said it will invest $425 million annually to raise its minimum wage for hourly employees to $11 an hour and offer a paid parental leave program. It also said it will spend at least half of its tax windfall on debt reduction and allocate at least $275 million to strategic investments in its business.

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The raise for employees follows similar actions by Humana Inc HUM.N and Walmart Inc WMT.N to attract workers at a time when a historically low U.S. unemployment rate is making it harder to find and retain minimum-wage workers.

“With $1.2 billion in cash benefits from the Tax Cuts and Jobs Act, we will be able to make strategic investments in our business in 2018 to stimulate greater growth over the longer term,” Chief Financial Officer David Denton said in a statement.

Shareholders may have been looking for CVS to use tax savings to return cash to them through share buybacks or increased dividends as some other companies have recently pledged.

CVS shares fell as much as 3.6 percent before paring some of those losses and were down $2.09, or 2.8 percent at $72.26.

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The company said it expected adjusted operating profit growth of 0.5 percent to 4.5 percent in the first quarter as it benefits from a bad flu season.

In January, the company projected a tax rate of about 27 percent this year versus 39 percent previously.

Excluding items, CVS reported adjusted fourth-quarter earnings of $1.92 per share, beating analysts’ average expectations by 3 cents, according to Thomson Reuters I/B/E/S.

Reporting by Nandita Bose and Bill Berkrot in New York; Editing by Andrew Hay and Steve Orlofsky