Just after mid-October, I wrote an article expressing that I was getting ready to go long Walgreens Boots Alliance (WBA). I subsequently bought the stock at a price of nearly $76. My rationale for doing so was that I believed investors to be overreacting to potential competition from Amazon (AMZN), and that the company’s growth in free cash flow continued to remain quite impressive.
Many readers agreed with my sentiment on the stock but ridiculed me for not jumping in at an earlier price.
For instance, one comment stated:
Source: Previous Seeking Alpha article
However, I bought because Walgreens Boots Alliance is fundamentally a strong company that continues to have significant upside regardless of price.
Fundamentally, let’s look at the stock’s price to free cash flow ratio. We see that price to free cash flow remains at virtually identical levels to that of last July:
Moreover, when we take a look at the long-term trend in free cash flow for this stock, we see that while price to free cash flow has fallen, free cash flow itself has continued to rise:
So, I see this stock as having significant growth ahead of it. As a case in point, I bought at $76, and the stock is now up to $80.19 at the time of writing:
That said, one point I made in my last article which I would like to elaborate on here - most of a long-term investor's return in this stock is likely to come from dividends, not capital gains.
Let’s take an example. Walgreens most recently increased their dividend payment by 10%, and over the past ten years, dividends have increased by a cumulative 291.1% (or 29.11% per year).
1-year dividend growth
10-year dividend growth
For the sake of argument, I will make the assumption that dividends will grow by 10% per year. Let us suppose an investor decides to buy $10,000 worth of shares in this stock. At today’s price, that would entitle the investor to 124 shares (not accounting for any fees or expenses).
Assuming capital gains of 7% per year and that the investor reinvests all dividends into buying more shares of stock, here is what I calculate that investor’s shares would be worth in 30 years:
|Year||Dividend Value||Investment Value||Investment Value plus Reinvested Dividends|
Source: Author’s Calculations
We can see that with the power of reinvested dividends, the investor’s holding is worth twice what it would be from capital gains alone.
So, I’m not particularly worried about not getting in at the bottom. Assuming a reasonable rate of growth in capital gains, coupled with a projected 10% dividend growth rate per year, a dividend investor stands to make significant long-term gains from this stock. Moreover, having grown dividends for over 42 years along with a payout ratio of just under 30%, this stock has a strong track record behind it:
To conclude, I sleep very well at night knowing that I am long this company. Walgreens Boots Alliance is a solid dividend aristocrat, and I fully expect the company to continue being a top dividend performer.
Disclaimer: This article is written on an "as is" basis and without warranty. The content represents my opinion only and in no way constitutes professional investment advice. It is the responsibility of the reader to conduct their due diligence and seek investment advice from a licensed professional before making any investment decisions.
Disclosure: I am/we are long WBA.
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.