Walgreens Boots Alliance Shows Great Results As It Integrates Rite Aid Stores

About: Walgreens Boots Alliance, Inc. (WBA)
by: Nick Mackintosh


The Q4 results and annual report have just been released.

The company's fundamentals are firing on all cylinders.

Based on its valuation it's still a great buying opportunity in today's market.

Thursday Walgreens Boots Alliance (WBA) published its annual report, and the results are impressive to say the least. I briefly covered WBA in my previous article on April 12, where I had this to say:

Based on the information listed above, I’m going to recommend a strong buy for Walgreens Boots Alliance and AT&T, with speculative buys for Meredith, Target, and Walmart.

Walgreens Boots Alliance is doing extremely well with its growth strategy, which has seen the best sales growth over the past 2 years, not to mention record U.S. pharmacy market share. Part of the growth is coming from their recent acquisition of Rite Aid (RAD) stores and the company raised guidance for 2018 just over 2 weeks ago.

The image above is the performance of my recommended stocks from that article, courtesy of YCharts.com.

Annual Report

Today the company published its annual report and they've shown impressive growth in both their top and bottom line. The revenue grew at a rate of 11.3% to $131.5 billion while their net income grew by a staggering 23.2% to just over $5 billion.

The company has also repurchased a total of 83.5 million shares to bring the diluted total shares outstanding to 995 million, this represents 7.74% being bought from the market and that definitely adds to shareholder value as the share price over the past year has ranged from undervalued to fair. It is far too common to see a company repurchase stock trading near all-time highs, it's refreshing to see Walgreen Boots Alliance using shareholders capital effectively.

Walgreen Boots Alliance generated free cash flow of $6.89 billion and only $1.73 billion was needed for dividend payments! The dividend is 1 of the safest I've seen in this sector, and all that extra cash went to the buyback program as that came to a cost of $5.22 billion. The company increased their debt slightly by $1.1 billion for anyone who was questioning the math there!

2014 2015 2016 2017 2018
Total Revenue (Millions) $76,392 $103,444 $117,351 $118,214 $131,537
Operating Income $3,577 $4,353 $5,964 $5,557 $6,414
Net Income $1,932 $4,220 $4,173 $4,078 $5,024
Free Cash Flow Per Share $2.89 $4.19 $5.98 $5.47 $6.93
Dividend Per Share $1.28 $1.36 $1.44 $1.52 $1.60
Free Cash Flow Payout Ratio 44.29% 32.46% 24.08% 27.79% 23.09%

I created the image and table above with data compiled from Morningstar and the company's annual report.

Company Outlook

The management is expecting guidance in EPS growth in the region of 7-12% at constant currency rates. They are also continuing the buyback program as they are expecting to repurchase an addition $3 billion worth of stock in 2019.

Executive Vice Chairman and CEO Stefano Pessina had this to say:

We are making progress on our partnership strategy both in the U.S. and internationally, including our most recent announcements with LabCorp, Kroger and Alibaba, which will provide additional opportunities for future growth


What I've found impressive as the years go by is that the company's capital expenditure as a percentage to their cash flow has gradually decreased over the years. This is not the result of them scaling back operations as capital expenditures have actually been increasing, and this is obvious when accounting for their acquisition of Ride Aid stores.

The reason for this is because the company is increasing its cash returns on capital invested. As an example from 2014, each $100 the company invested would have given them a return of $13, whereas in 2018 it is $18.

Year Cap / Flow CROIC FCF PS
2014 28% 13% $2.89
2015 22% 11% $4.19
2016 17% 17% $5.98
2017 19% 16% $5.47
2018 17% 18% $6.93

To put this in terms of free cash flow per share, over the 5 year period from 2013 to 2018 it has grown a massive 114.55% from $3.23 to $6.93. This is a complete disconnect in relation to its total return performance over that period of time, which is a disappointing 43.68% with 30.27% of that coming from share price appreciation and the rest in dividend payments.

Based on free cash flow per share of $6.93 and a share price of $73 we're getting a P/FCF of 10.53 or a yield of 9.5%. Whereas the 24 stocks I monitor within the Dow Jones Index (DIA) average a P/FCF of 24.41.


If you were to invest in Walgreens Boots Alliance, the dividend yield is only 2.41% but with a payout ratio of a meager 23.09% the company has plenty of room to grow it without being concerned. The company has increased dividends for 43 years in a row and its last increase was 10% that was announced June 28.

The company has been undervalued for a long time and I strongly believe that this continues to be a great opportunity for investors to take advantage in an overbought market. The potential earnings and dividend growth should easily provide total returns exceeding the market going forward at this valuation. For this reason, my recommendation of "strong buy" remains unchanged.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.