Walgreen Co. (WAG), together with its subsidiaries, operates a chain of drugstores in the United States. The company is a member of the dividend aristocrats index, has paid dividends since 1933 and increased them for 37 years in a row.
The company’s last dividend increase was in July 2012 when the Board of Directors approved a 22.20% increase to 27.50 cents/share. The company’s largest competitors include CVS Caremark (NYSE:CVS), Rite Aid (NYSE:RAD) and Wal-Mart Stores (NYSE:WMT).
Over the past decade this dividend growth stock has delivered an annualized total return of 1.50% to its shareholders.
The company has managed to an impressive increase in annual EPS growth since 2002. Earnings per share have risen by 12.90% per year. Analysts expect Walgreen Co. to earn $2.60 per share in 2012 and $3.03 per share in 2013. In comparison Walgreen earned $2.94/share in 2011.
The company has consistently repurchased stock over the past 7 years, reducing its share count from 1,025 million shares in 2004 to 865 million in 2012.
One of the major headwinds that Walgreen was facing was that it stopped filling prescriptions for Express Scripts, which accounted for a large amount of sales. Express Scripts has since merged with Medco, forming one of the country’s largest Pharmacy Benefit Managers. The risk that Walgreen faced is that other Pharmacy Benefit Manager companies might try to squeeze it, which could further depress margins and earnings. However, recently it had signed an agreement with the company, which also alleviated concerns about Walgreen’s upcoming renewal with Medco. The issue with this deal is that Walgreen lost a lot of customers. Pharmacy customers tend to be loyal, and do not like to switch prescription providers easily.
Now that these concerns are alleviated, Walgreen also focused on acquisitions. It is in the process of acquiring a 45% interest in Alliance Boots, an international pharmacy and wholesale operator, for $6.7 billion in cash and stock. The $6.7 billion is broken into $4 billion in cash and 83.4 WAG million shares. Walgreens also has the option to acquire the remaining 55% of Alliance Boots in three years. The company expects synergies of $100 - $150 million would be realized from this deal in year one, rising to $1 billion by 2016.
Walgreens expects to increase comparable stores count by 2.50% – 3%. Store renovations, improving the product mix, and increasing inventory efficiency will add to profitability, as will realizing synergies from acquisitions such as the Duane Reade one. The company’s integration of Drugstore.com, will pave the way for expanding the company’s web presence.
The return on equity has remained stuck in range between 17% and 19% over the past decade, with the exception of a brief decrease below 15% in 2009 and 2010. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
The annual dividend payment has increased by 18.90% per year over the past decade, which is higher than the growth in EPS.
A 12.90% growth in distributions translates into the dividend payment doubling almost every four years. If we look at historical data, going as far back as 1986 we see that Walgreen’s has actually managed to double its dividend every five years on average.
The dividend payout ratio has almost doubled from 15% in 2002 to 25.50 in 2012. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Currently, Walgreen is attractively valued at 12.30 times earnings, has an adequately covered dividend and yields 3%. I would consider adding to my position in the stock subject to availability of funds.
Full Disclosure: Long WAG and WMT
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