Today’s analysis takes us to Walgreen Company (WAG).
From Yahoo Finance:
Walgreen Co. operates a chain of drugstores in the United States. These drugstores sell prescription and non-prescription drugs, and general merchandise. General merchandise includes beauty care, personal care, household items, candy, photofinishing, greeting cards, seasonal items, and convenience food. The company provides its services through drugstore counters, as well as through the mail, by telephone, and on the Internet. As of November 30, 2006, Walgreen operated 5,580 stores, including 3 mail service facilities, 38 home care facilities, 22 clinic pharmacies, and five specialty pharmacies in 47 states and Puerto Rico.
Walgreen’s has a market capitalization of $43.79B and employs over 142,000 people.
Readers of Dividends Matter know how I like to start my analysis with a look at the return on invested capital. And Walgreen’s does not disappoint. Walgreen’s management has consistently produced returns in the 17% range over the entire 10 year period. The five-year average ROIC is 16.90%. Solid and consistent.
Since Walgreen has almost non-existent debt, the return on equity parrots the ROIC. The 10 year average is 17.11% and the five-year average is 16.56%.
The equity growth rate has been solid, but on the decline. Over the 10 year period, the average growth rate was 17.48%. The five-year average drops to 14.05% and last year’s equity growth rate remains at 14.43%. Solid growth numbers.
As should be the case, the earnings per share growth rate deliver very similar results to the equity growth rate with an overall average of 16.32%. Over the last five years, it has been 15.20%.
Sales growth rates are steady with a slight decline.
Walgreen has a rather small dividend yield of 0.69%. That is very low compared to the dividend yield available on the S&P 500 Index and the DJIA.
We would hope that the dividend growth rate will make up for this small dividend with some fantastic growth numbers. Unfortunately, that has not been the case, although the last three years have had fantastic growth rates of 16%, 22% and 22% respectively. Over the 10 years, the dividend growth rate was an unassuming 8.55%. The last three years are more indicative of the type of growth any dividend investor would want to see.
Great news though, is that the dividend payout ratio is very low at 16%. Even if earnings do not keep up, Walgreen will still have the ability to raise their dividends at a healthy pace by increasing their super low dividend payout ratio.
And Walgreen’s has had a solid, consistent cash flow growth rate over the 10 years to pay for these dividends. Very steady at around 15%.
From a historical yield perspective, the 10 year average high dividend yield is 0.73%. Over five years, it is 0.60%. As you can see, Walgreen’s has never had a very high dividend yield. So, assuming that we demand 0.73% dividend yield, the model price is $42.65. At the current price of $44.69, that would be a premium of 4.79%.
Determining the Graham number shows us that Walgreen’s is trading at a premium of 108% at a price of $21.41. Two methods, two vastly different results.
For the discounted present value method, the inputs I used were:
• a future P/E of 22.02 (Walgreen’s is currently trading at a historical low P/E)
• a future EPS growth rate of 14.05% (which represents the 5 year average equity growth rate and was more conservative than the analysts’ forecast of 15.6%)
• consistent dividend yield of 0.73% (the 10 year average high dividend yield)
• future dividend growth rate of 8.55% (the 10 year average dividend growth rate which I hope is on the very conservative side considering the great dividend growth over the last three years)
From this information, I determined a model price of $45.22. That means that the stock is currently selling at a slight discount of 1.16%!
See my calculations here.
Walgreen has had solid fundamentals over the last 10 years and basically has no debt. Although the dividend yield is low, I hope that the trend over the last three years will settle in for future dividend growth rates. And there is lots of room to maneuver with the low payout ratio of 16%.
Two of my valuation methods show that Walgreen’s is basically trading right around its model price.
I think Walgreen’s deserves a spot in our superior dividend yielding portfolio. What are your thoughts?
WAG 1-yr chart:
Full Disclosure: At the time of this writing, I do not own any shares in WAG.