- Walgreen not moving to Switzerland, but still can!
- Walgreen has the leverage to force the U.S. to change its tax code to become more competitive globally.
- Regardless of Walgreen's corporate headquarters, the investment outlook remains the same.
As everyone knows, Walgreen (NYSE: WAG) will not be relocating to Switzerland after it acquires the remaining 55% stake of Alliance Boots; it will stay in Chicago. Walgreen's decision of whether or not to move out of the country has been a hot topic on Wall Street, and even more with politicians such as President Obama, who recently called tax inversion "wrong" regardless if it's legal. Therefore, while Walgreen has elected to stay, it might still hold a significant amount of leverage over Washington, which in this case is good for business owners, and investors, everywhere.
Walgreen changes the plan
Walgreen, a company with more than $4 billion in earnings before interest and taxes last year, paid income tax of $1.44 billion last year, giving it a corporate tax rate of 35%. While big name pharmaceutical and technology companies store cash and earnings overseas to avoid paying such high taxes, Walgreen is especially vulnerable to the U.S. tax code due to having no global or e-commerce presence.
Therefore, when Walgreen bought 45% of Alliance Boots, for $6.7 billion in 2012, many thought the company would relocate to Switzerland once it acquired the remaining stake in 2015, reportedly worth $10 billion.
If so, Walgreen's corporate tax rate would fall to just 17.9 %, essentially cutting the company's income tax payments in half. However, after political and consumer pressure, Walgreen has elected to stay in the U.S., although it still plans to acquire Alliance Boots.
The ball's in Washington's court
While a lower tax rate would be great for Walgreen as a company, many have feared that consumers would find the move to Europe an un-American or unethical decision, and elect to use other pharmacies such as CVS (NYSE: CVS) or Rite Aid (NYSE: RAD) in the process. Perhaps this was the driving force behind Walgreen's decision.
However, it also puts Walgreen in a rare situation that we haven't yet seen among those companies with the opportunity for tax inversion. Walgreen is staying here in the U.S., but at any point it wants, the company could move to Switzerland for tax inversion.
Essentially, this puts the ball in Washington's court, to make changes to the U.S. tax code so that businesses don't have to pay so much, and are forced into drastic decisions in order to avoid paying obscene tax rates relative to the rest of the globe.
Losses make Walgreen a buy
Either way, regardless of what Walgreen decides long term, the stock is now presenting an incredible investment opportunity. Thanks to the near 15% stock losses it has seen in the last month, Walgreen is trading at 21.7 times trailing 12-month earnings.
While its earnings might not be artificially catapulted by tax savings, the company will become incredibly larger once it acquires the remaining 55% of Alliance Boots. In retrospect, Walgreen has already paid $6.7 billion, and will pay the other $10 billion, which will likely lead to some minor stock dilution. Yet, given Walgreen's relatively low debt position compared to its assets, the company should be able to swallow Alliance with minimal impact on the stock.
With that said, Walgreen will gain a company that grew revenue 4.3% in fiscal 2014 to $32 billion while net profit soared 31% to $1.3 billion. Hence, Walgreen's revenue will jump 40% and its profit nearly 50%. If the company increases its shares outstanding by 100 million shares to acquire Alliance, Walgreen would trade at roughly 0.60 times sales and less than 16 times trailing 12-month earnings.
Keep in mind, this doesn't account for future revenue or margin growth, both of which Walgreen and Alliance have seen consistently. Therefore, from a stock value perspective, Walgreen doesn't need Europe, but now that we know for certain that it's acquiring Alliance, the upside value is apparent, while the opportunity for tax inversion will always remain if the U.S. fails to act.
The U.S. shows progress, but still has a lot of work
With that said, the U.S. has shown at least some willingness to make changes to benefit large corporations that pay the most in taxes. Most recently, the IRS gave Windstream (NASDAQ: WIN) a favorable ruling to spin many of its fiber and copper networks into publicly traded REITs. Importantly, such a move is tax-free, as Windstream's revenue-generating businesses will no longer be viewed as such, but rather as real estate to the IRS.
Perhaps with Walgreen's large real estate presence it was encouraged with the IRS's ruling, one that's a bit odd given the fact that REITs historically own but do not operate assets, like a mall owner. Either way, it was a show of action on behalf of Washington to look at certain assets of a business and then make changes to the way taxes are paid.
So, might this be the start of widespread changes within the U.S. tax system? At this point, Walgreen holds the greatest leverage over the U.S. to force such change, as it could theoretically pack up and move to Switzerland at any time after it completes the purchase of Alliance Boots. For small and medium sized businesses, Walgreen might just be your best friend, a company that created controversy with the threat of tax inversion, and which is large enough to force substantial changes to the corporate tax code.
After all, in business when you're not competitive, you lose customers. In this particular case, the U.S. is not competitive with corporate taxes, yet Walgreen is showing a willingness to stay loyal. Although, how long will that loyalty last if the U.S. makes no effort to change? Probably not long!
Either way, Walgreen remains a great investment opportunity due to the acquisition of Alliance Boots, and its continued revenue and margin growth.