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Walgreen Co. - A 5-Star Stock Trading At A Discount, But Is It Enough?

Dividends4Life profile picture


  • Walgreen Co. is the largest U.S. retail drug chain in terms of revenues. The company operates more than 8,000 drug stores throughout the U.S. and Puerto Rico.
  • In August 2014, the company exercised its option to acquire the remaining 55% of Alliance Boots for $5.3 billion in cash and 144.3 million shares in WAG stock.
  • The company faces several headwinds including margin pressures, adverse changes in the pharmacy business environment, increased uses of generic drugs, a shift toward 90-day mail-order and retail prescription refills.

Linked here is a detailed quantitative analysis of Walgreen Co. (WAG). Below are some highlights from the above linked analysis:

Company Description: Walgreen Co. is the largest U.S. retail drug chain in terms of revenues, this company operates more than 8,000 drug stores throughout the U.S. and Puerto Rico.

Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

Walgreen is currently faced with several headwinds including ongoing pharmacy gross margin pressures, recent changes in the environment of the company's pharmacy business, ongoing generic drug inflation, reimbursement pressure and a shift in pharmacy mix toward 90-day prescription refills at retail locations and Medicare Part D. The generic wave in the pharmaceutical industry remains a threat to revenues.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%

WAG earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. WAG earned a Star for having an acceptable score in at least two of the four Key Metrics measured.

Rolling 4-yr Div. > 15% means that dividends grew on average in excess

This article was written by

Dividends4Life profile picture
My entire career has been spent in industry within the finance and accounting realm. My career started in 1985 and has included exposure to implementing SFASs

Analyst’s Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (18)

pim69 profile picture
Ummm... wag p/e is outrageous. This leaves me questioning your valuation methods to have a higher target price when p/e is above 30. Does it need to be 40 or 50 to be overvalued?
DavidBaird profile picture
I have about 200 shares of WAG with a yield on cost of 4%. While I believe WAG to be way too high at the moment..... I will probably hold on. I doubt that we will see it at $53 anytime soon.....unless the bottom falls out of market.
Fastjag profile picture
I've had WAG for over 50 yrs. and 4 splits. Will not sell, will leave it to my kids at the price when they get them. Will not give obama any more monies in capital gains.
Good thinking. My alternative 20-input 10-year DCF projection must have it grow a high 11.5% over a decade for the intrinsic to come up to market from below. (Overvalued now in the absence of a catalyst long-term.)
Robbsbeach profile picture
Walgeens increasing price was/is built on the quicksand of Hedges funds investors.
There positions were based on the quick profit built into a tax inversion.
Hedge funds average buy in cost is much higher then the current trading price of 66-67..IMHO

I agree with Dave J. on a fair value of 53+
And you don't think Express Scripts, Alliance Boots tie up and aging Baby Boomers, along with mini healthcare locations won't add to the value of a WAG on "every corner"...??

The only hold back that I can determine is "generic drug" pricing along with possible fluctuations in the AHCA...pricing adjustments..
And maybe WalMarts nearby??
Of course that is more than enough maybes...?
The drop of almost $10 p/s was not justified, by lack of inversion..IMO.
Dave J... profile picture
Fair value per Fast Graphs = 53.10 at year end.
25540633 profile picture
I think Walgreen's share price $53.10 will not be materialized at year end unless macroeconomics and/or its company sales/finance issues that has major impacts on the company.
docklc profile picture
A good analysis, I will be looking more closely at WAG (and CVS). Thanks.
Surprised article did not mention...Recent deal or tie-up with "Express Scripts" again....? Should work well to mail, pick-ups or bottomline.
This caused Walgreen some pain a couple years back, when there were cancelation, I think of contracts?....CVS took some share at that point..

As far as Alliance Boots, I would think nothing but accretive down the road..IMO.
And at this time or the recent past do not believe tax inversion would have served them well in the long run...Or perceptions by many of their customers.

I have trouble faulting WAG, and have also owned others with CVS in the past(no longer)...
Long time owner of WAG shares, it brought us through the early Recession, and helped save us, with diversification into other beaten down equities..
Our recovery was "very swift" in most terms, pretty much giving credit to WAG sales and repurchases for us..
We have traded Walgreen, in and out about 5 times over the last 10 years or so.
Always making and taking profits and never/seldom missing the dividends..
Probably owning some shares over 15+ years, not counting MFunds.

Not quite a full position at this time, but has been a core holding occasionally.
Should have picked up a couple more hundred shares in the recent dip, during inversion discussions. But didn't, maybe on another dip some day.?
Only wish, is that believe dividend should be increased to higher level.
But with appreciation and dividend...A lovely investment.
At the corner of "Happy and Healthy"...
When my employer , a Dow 30, with thousands of employees, switched our prescription plan from WAG, to CVS a few years back, it appeared that WAG was slaking, like Kmart did years ago when Walmart took away all of their customers. It looked to me that CVS was doing the same thing, working hard to get customers in the big prescription business. I sold most of my WAG. The dividend wasn't enough to keep me in.
I agree, I don't like the company to begin with or the store and their scam pricing policies. I have better stocks that not only have appreciated more but are far more generous in dividends.
edhaven profile picture
I am long on WAG. As a 39 year dividend champion it has been a good choice in my portfolio.
jmadiara profile picture
Nice article Div4life. I have owed WAG since 2010 and it is one of my winners. I will be holding onto WAG Long-Term. Check out the dividend increases since 2010:
8/2010 0.59 24% 2.1%
8/2011 0.75 28% 2.7%
8/2012 0.95 27% 3.5%
8/2013 1.14 20% 4.2%
8/2014 1.28 12% 4.7%

Dividend Growth Rate: (5yr Avg) 23.6%
That post was a great easily understood profile I can wrap my arms around.
Hardog profile picture

roger that waiting for it to get closer to 3% yld
eftvox profile picture
WAG is dumpy. Stores and stock in decline. And they initiated back from deals as the genesis for Dodd Frank. They stink.
I don't like the company or its paltry dividend and High price.I can own several others that have a higher safe dividend. Their store pricing policies are a bit deceptive. Not my Peter Lynch style.
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