Correction Arrived Early For Walgreen - So Now What After Only OK Dividend Hike?

Aug. 8.14 | About: Walgreens Boots (WBA)

Summary

After announcing it would complete its purchase of Alliance Boots while rejecting the idea of a tax inversion, WAG's share price plummeted 16.4%.

A 7.1% dividend hike was almost lost in the announcement.

WAG was a big winner for me when I bought it in 2012 after the company decided to buy 45% of Boots.

Is the dividend raise enough to entice current and potential future shareholders?

On June 19, 2012, Walgreen (WAG) announced it was buying 45% of European drug store chain Alliance Boots. Investors weren't thrilled, driving down the share price 10.7% over the next 24 hours to an intraday low of $28.53. That capped a two-month, 20.6% price swoon for the stock, which had traded at $35.93 on April 20.

Although it was almost lost in the news of the day, Walgreen's simultaneous announcement of a 27.4% dividend hike - pushing yield to 3.7% - is what piqued my interest. I did some quick digging, decided I actually liked what Boots could bring to the table and loaded up on shares at $30.

If that's not the best buy of my relatively young Dividend Growth Investing career, it certainly is in the team picture.

Now, let's fast-forward 26 months. Walgreen again is the biggest newsmaker among Dividend Aristocrats thanks to the financial and political ramifications surrounding its association with Alliance Boots.

On Wednesday, the company announced it would exercise its option to buy the remaining 55% of Boots. While that alone probably would have put investors on edge a bit, it was a minor blip compared to the bombshell: Management decided to keep its operations in Chicago, meaning the company would not try to relocate its headquarters to Switzerland to save billions of dollars in corporate taxes.

With tax inversion off the table, investors revolted, sending share price from $69.12 at Tuesday's close to as low as $57.75 - a resounding 16.4% plunge in a matter of hours. That completed a 24.4% drop from the company's all-time high of $76.39 reached less than two months ago. By Thursday, the share price had bounced back some to the $59-$61 range.

While the long-anticipated major market pullback has yet to take place, obviously Walgreen has experienced its own correction. Wednesday's announcement of a 7.1% dividend increase (to $1.35 annually) was an afterthought to investors, as was a $3 billion share buyback plan.

And so I am asking myself the same question today that I did 26 months ago: Is it time to load up on WAG?

My short answer: No.

I still believe the Boots acquisition will add significantly to the company's bottom line over time. I also think Walgreen did the right thing in keeping its HQ in Chicago. With President Obama and hundreds of lawmakers threatening legislation that would close what they consider an un-American and morally objectionable loophole, it was a prudent decision, at least for now.

Although the market seems to have overreacted, it's hard to argue that Walgreen wasn't overvalued at $70-plus, where its P/E ratio exceeded 25 and its dividend yield had fallen below 1.8%. Those who sold in the $70s are smiling broadly today.

About That Dividend ...

There are many other recent articles on Seeking Alpha that go into great detail about the company's fundamentals and metrics, so I am concentrating primarily on income.

Even with the price plunge and dividend increase, Walgreen has a yield of only 2.25%. This is below the threshold of many DG investors. Additionally, while I rarely look down upon a 7.1% divvy hike, it pales in comparison to the 27.4% raise that accompanied the Boots news of two years earlier - not to mention WAG's historical DG of 23.2% over five years and 22.0% over 10. Indeed, this was Walgreen's smallest percentage raise since 2002.

The 27.4% hike of 26 months ago made me sit up and say, "Despite the noise, I want WAG." Wednesday's more pedestrian raise made me shrug my shoulders and say, "Is that all?"

If I didn't already hold WAG and wanted to own a proven, blue-chip, dividend-growing American company, I might grab a taste here. Given that I am a shareholder, I am looking for a better value point before topping off my position.

I'll start getting more interested in WAG if it approaches $55.10, where the yield would be 2.45% - which rounds up to 2.5%. Better yet would be $54, which actually is the 2.5% yield mark.

Until then - and even after then for some investors - there are far more attractive income plays available.

Disclosure: The author is long WAG. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.