Lack of Safety Margin Makes Walgreen a Poor Investment Right Now

| About: Walgreens Boots (WBA)

Walgreen (WAG) is one of the US largest retail pharmacies, with about 7,500 stores. Prescription drugs represent about 65% of sales, with the rest coming form nonprescription drugs and convenience items. I added Walgreens to my idea pipeline as it recently announced good results and was in the portfolio of a couple value investors I follow. The stock currently trades at $33-34.

Please refer to the Quick review explained post if you have questions on what I look for in this analysis. Click on this annotated Surfmark if you want to see the source data for this Quick Review.

1. Business Performance Risk (=) and intrinsic returns (=/-)



FCF / Sales

LTM: 3.8%, ahead of historical performance which has historically been between 1% and 2%


LTM: 14.0%, lower than the average over the past 5 years of 17.7% and lower than any year over the last 10 years


LTM: 7.9%, lower than the average over the last 5 years of 10.4% and lower than performance over the last 10 years

Revenue Growth

Annual revenue growth has been declining but is still strong with a 3 year average of ~10%. More recently growth has been in the 6% - 7% range

Cash distribution to shareholders

WAG pays a 1.7% dividend on a payout of about 25% of earnings.

Over the last 5 years, WAG has bought back about 3% of its shares

WAG appears to have an ok business, with a low FCF generation (usually between 1% and 2% of sales) driven in large part by its constant purchase of properties. Returns are both currently under my personal thresholds, but given the industry this could be acceptable. However the trend has definitely been down in the last few quarters, which worries me a bit. Similarly, while revenue growth has been strong it has clearly declined recently.

In terms of intrinsic returns, we could have something like:

  • Dividend: 1.7% yield on a payout ratio of 25%
  • Growth of 7% on a ROE of 14%, using up 50% of earnings
  • Buybacks using the 25% of earnings left, which using the current earnings yield of 6.1% leads to a potential buyback of 1.5% every year

Total potential returns: 10%, barely making my personal bar

2. Balance Sheet Risk (+)



LT Debt / Equity

0.16x: very little debt

Current Ratio

1.7x, in line with historical performance and not overly aggressive for a retailer

Strong Balance sheet with very little credit or liquidity risks

3. Valuation Risk (+)



Cash Return



P/E of 16.3x, ahead of the S&P but lower than the average over the last 5 years (20.4x)

While WAG seems to have a somewhat high P/E valuation (compared to market average), its cash return at 7.4% appears to be reasonable. However these types of metrics for a company that I don’t expect to grow at more than 7-8% will probably not leave enough margin of safety to invest with confidence.


Walgreens has an ok business which is using up a lot of its own cash to generate a growth that has been slowing in recent quarters. In addition, while returns are ok, they are not great. Given the current valuation I don’t think Mr. Market would leave an investor with enough margin of safety to invest. I will for now not perform a stock analysis, but would be willing to reconsider my position if the stock was to decline ~20%, bringing P/E below 15 and dividends over a 2% yield.

Disclosure: No position