Dividend Aristocrats in Focus Part 49: Walgreens Boots Alliance - Sure Dividend Sure Dividend

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Dividend Aristocrats in Focus Part 49: Walgreens Boots Alliance

Updated on February 20th, 2019 by Nate Parsh

A good place to look for the best dividend growth stocks is the list of Dividend Aristocrats. This is a select group of 57 companies in the S&P 500 Index with 25+ consecutive years of dividend increases.


We review all 57 Dividend Aristocrats each year. Next up is pharmacy giant Walgreens Boots Alliance (WBA). Walgreens has increased its dividend for 43 years in a row.

A video discussing Walgreens’ dividend safety in further detail can be seen below:


The stock currently yields 2.6%, above the average yield of 1.9% for the S&P 500.

Walgreens has a strong brand, and is an industry leader. It still has room for growth moving forward, and has a long history of annual dividend increases. The stock has gained 3.6% over the past year, outpacing the 2.2% return of the S&P 500.

As a result, we believe Walgreens stock is an attractive buy.


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Business Overview

Walgreens was founded all the way back in 1901. In its current form, the company was created when Walgreens merged with Alliance Boots in 2014. The merger created the largest retail pharmacy in the U.S. and Europe. Today, together with its equity method investments, Walgreens Boots has more than 18,500 stores in 11 countries around the world.

WBA Overview

Source: Investor Presentation

Investor sentiment has been subdued in recent years, due to fears of rising competition from online retail giants like Amazon (AMZN).

This is a challenging time for all of retail. The rapid growth of e-commerce has put pressure on brick-and-mortar retailers. However, Walgreens hasn’t skipped a beat. The company recently concluded fiscal 2018, and the results were very strong.

Walgreens reported 18% adjusted earnings-per-share growth for fiscal year 2018 and sales increased 11.3%, thanks to strong business execution and the continued integration of the recently-acquired Rite Aid stores. Expanded pharmacy market share was a major contributor to growth.

The most recent quarter showed that the company continues to perform well. Net sales improved nearly 10% in the first quarter of fiscal year 2019 while adjusted earnings-per-share grew 14.4%. Top and bottom lines were supported by higher prescription volumes from the Rite Aid stores.

U.S. retail sales were higher by 14.4% from the previous year. Once again, the Pharmacy segment of the business led the way.

WBA Pharmacy

Source: Investor Presentation

Pharmacy sales were up 17.5% while prescriptions grew 11.4%. Even without the addition of Rite Aid, pharmacy sales and prescriptions still grew 2.8% and 2.0%, respectively.

And, Walgreens continues to take share in the critical, high-growth category. Prescription market shares increased 180 basis points to 22.4%. Organic growth increased 4.3% during the quarter.

On the other hand, the company’s international segment saw a 6% decline in sales due to negative currency translation, the divestiture of Boots Contract manufacturing and soft market conditions in the U.K. Comparable U.S. retail sales dropped 3.2% due to special events in the previous year.

Currency is expected to be a $0.07 headwind to earnings-per-share in fiscal 2019. However, there should be plenty of room for growth next year and beyond, thanks to organic growth, as well as the continued integration of the Rite Aid acquisition.

Growth Prospects

Walgreens’ most important catalyst in the U.S. has been to grow through new stores and customers. It has accomplished this through acquisitions.

For example, Walgreens recently acquired over 1,900 Rite Aid (RAD) stores, three distribution centers, and related inventory, for $4.375 billion. 458 Rite Aid stores were optimized in 2018, with more renovations coming in 2019.

As discussed above, the Rite Aid transaction has already helped Walgreens grow earnings.

Walgreens is assuming the real estate obligation, but is not assuming any debt. And, the acquisition should also result in a tax benefit, from amortization of intangible assets.

There will be significant cost synergies to accelerate earnings growth from the acquisition. Since Walgreens and Rite Aid have nearly identical operations, Walgreens will be able to eliminate duplicated functions across the business. Walgreens expects to realize more than $300 million in annual cost savings by 2021.

Share buybacks will also help fuel Walgreens’ future earnings growth. Last year, Walgreens approved an additional $10 billion to the company’s share repurchase authorization. This represents nearly 15% of the current market capitalization of the stock, meaning the buyback could be a significant boost to EPS.

For fiscal 2019, Walgreens expects adjusted earnings-per-share of $6.40 to $6.60. At the midpoint, earnings would increase 8% in 2019, which would represent another year of strong earnings growth.

Looking out further, Walgreens should continue to grow earnings for the long-term, due to very favorable macro-economic conditions. Specifically, the U.S. is an aging population. As they age, consumers will have higher demand for healthcare products and prescriptions.

Judging by Walgreens’ recent financial results and future outlook, it is clear the highly pessimistic sentiment is misguided. There is nothing wrong with Walgreens from the perspective of its fundamentals, which remain strong.

Competitive Advantages & Recession Performance

The first competitive advantage for Walgreens is its scale. Walgreens has one of the world’s largest global wholesale and distribution networks, with nearly 400 distribution centers that supply more than 230,000 pharmacies, doctors, health centers, and hospitals.

With such a massive global footprint, it is very challenging for a competitor to compete on the same scale as Walgreens.

Despite the difficulties facing retail, there is still an operational advantage of physical stores. Most of the U.S. lives within a short distance of a Walgreens store. As a result, it is very difficult for competitors to take market share.

Separately, Walgreens benefits from a strong brand, and operates in a stable industry. Consumers cannot go without prescriptions and health care products. This helps earnings stay afloat, even during recessions.

For example, Walgreens suffered only a slight decline in earnings-per-share during the Great Recession:

Walgreens grew earnings-per-share from 2007 to 2010. It followed up this performance with over 20% earnings growth in 2011.

Earnings-per-share have nearly tripled from fiscal year 2009 to fiscal year 2018, which equates to a CAGR of more than 24% during this time period. Erring on the side of caution, we anticipate an annual earnings growth rate of 8% through 2024.

It is clear that Walgreens has a recession-resistant business model, which helps it raise its dividend each year.

Valuation & Expected Returns

Walgreens has a current share price of $73 and a midpoint for adjusted earnings-per-share of $6.50 for fiscal 2019. As a result, the stock trades for a price-to-earnings ratio of 11.2. This is a low valuation for a highly-profitable company with a strong brand and leadership position in its industry.

In addition, Walgreens appears undervalued, relative to both the market and its own historical averages. The S&P 500 Index has an average price-to-earnings ratio of 21.3.

Over the past 10 years, Walgreens held an average price-to-earnings ratio of 16.2. Due to slower growth, we have a 2024 price-to-earnings ratio target of 15 for the stock.

If shares were to expand to meet our target valuation, investors would see an addition 6% added to annual returns over the next five years. Plus, Walgreens will generate returns from earnings growth and dividends. Expected returns could be as follows:

In this forecast, total annual returns could reach 16.5% through 2024. This is an excellent projected rate of return, and indicates that Walgreens stock offers a mix of all attractive qualities. The company has compelling growth potential,  is undervalued, and offers a solid dividend yield.

The combination of these three major catalysts results in a buy recommendation for value and income investors.

Final Thoughts

When it comes to retail stocks, there is a great deal of fear in the market. This is apparent, even with strong retailers like Walgreens. Not only are investors worried about a sluggish environment for brick-and-mortar retailers, but the threat of Amazon entering the healthcare industry is a constant overhang.

Walgreens remains a strong company, with a great brand and positive growth prospects moving forward. The addition of Rite Aid has allowed the company to grow its prescription drug market share.

In addition, Walgreens offers an above market dividend yield. Given the business fundamental, the company should have no trouble raising the dividend every year. We view the stock as significantly undervalued and recommend investors looking to initiate a position in Walgreens do so at the current price.

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