Walgreen Co. - A 5-Star Stock Trading At A Discount, But Is It Enough? (NASDAQ:WBA)

42.98K Followers

Summary

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 of 15% for each consecutive 4-year period over the last 10 years (2005-2008, 2006-2009, 2007-2010, etc.). I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1933 and has increased its dividend payments for 40 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high-yield MMA. Two items are considered in this section; see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to > MMA

WAG earned a Star in this section for its NPV MMA Diff. of the $3,010. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as WAG has. If WAG grows its dividend at 15.0% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 2.98%. WAG earned a check for the Key Metric "Years to >MMA" since its 3 years is less than the 5 year target.

Memberships and Peers: 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. The company's peer group includes: CVS Health Corporation (CVS) with a 1.3% yield, Rite Aid Corp. (RAD) with a 0.0% yield and Wal-Mart Stores Inc. (WMT) with a 2.5% yield.

Conclusion: WAG earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks WAG as a 5-Star Very Strong stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $134.10 before WAG's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 40 years of consecutive dividend increases. At that price, the stock would yield 1.0%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 8.7%. This dividend growth rate is well below the 15.0% used in this analysis, thus providing a margin of safety. WAG has a risk rating of 1.50, which classifies it as a Low risk stock.

With over 8,000 drugstores, WAG offers unmatched convenience with one of the the most recognized brand names in the retail pharmacy business. The company enjoys a strong market share within the relatively stable U.S. retail drug industry.

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. It is expected to close by the end of March 2015, pending normal regulatory and shareholder approvals.

In addition to acquisition integration, the company faces several headwinds including margin pressures, adverse changes in the pharmacy business environment, increased uses of generic drugs, a shift to toward 90-day mail-order and retail prescription refills and Medicare Part D.

Competitors such as Wal-Mart and CVS continue to put pressure on WAG's market share. The stock is trading below my $108.93 calculated fair value; however, its yield of around 2% is below my current minimum. For now, I will continue to watch for a more favorable time to buy.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion.

Disclosure: At the time of this writing, I held no position in WAG (0.0% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.

This article was written by

Dividends4Life

42.98K Followers

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.

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