- Walgreens is becoming a healthcare provider.
- Guidance for post-2024 is 11% to 13% per year EPS growth.
- Expanded profits will be dependent on expansion of primary health care offerings.
Walgreens, the best-known part of Walgreens Boots Alliance (NASDAQ:WBA), at least in the U.S., mostly brings to mind a chain of brick-and-mortar stores filling prescriptions and selling typical drugstore sundries. However, according to its executives, a transformation has already begun that will accelerate later in this decade. At the investor event and fiscal Q4 presentation on October 14, those executives made their case over three hours. The stock rallied, closing at $50.77 (it has pulled back some since). Since even at today’s price levels Walgreens pays a healthy dividend, if the dream comes true, we could have a growth plus dividends stock that is very attractive to investors. This could mean P/E multiple expansion above the current value of near 20. That, of course, assumes everything goes according to plan.
This is my first Seeking Alpha article on Walgreens. In the past, both my portfolio and my articles focused on the biotech sector, especially small and medium capitalization pharmaceuticals. Only a few of my stocks paid dividends, notably Gilead Sciences (GILD). In 2019, I decided to start investing more in dividend stocks, including biotechs like Bristol Myers (BMY), but also branching out to companies in other fields. My initial purchase of WBA in February 2021 was part of the plan. The pharmacy aspect of Walgreens makes it adjacent to the pharmaceutical space I am knowledgeable about. But my best purchase for dividends so far has been Star Bulk Carriers (SBLK).
This article assumes the reader is familiar with the traditional Walgreens chain. It will summarize the plan for growth, but not in the detail provided by the 3-hour presentation Thursday. I will focus on the U.S., rather than the Boots division in the United Kingdom. The plan seems reasonable, but I will point out some places where the plan could go wrong in the Caveats section below. First, the Q4 numbers summary and the guidance that led to the excitement.
Walgreens fiscal Q4 2021 results
The fiscal fourth quarter for Walgreens ended on August 31. GAAP revenue was $34.3 billion, up 13% from $30.4 billion year-earlier. Net income was $627 million, up 68% from $373 million year-earlier. Earnings per share (EPS), diluted, were $0.72, up 67% from $0.43 year-earlier. But $0.31 of earnings was from discontinued operations (divestment of Alliance Healthcare to AmerisourceBergen (ABC)), so earnings from continuing operations were $0.41. Adjusted (non-GAAP) EPS was $1.17, up 29.5% y/y. Sales were driven in part by Covid testing and vaccinations. $5.5 billion of revenue was from outside the U.S.
The balance sheet showed Walgreens had cash and equivalents of $1.19 billion when the quarter ended. Cash flow from operations in the quarter was $5.56 billion. Capital expenditures were $1.4 billion. Long-term debt ended at $7.68 billion. As Walgreens is in expansion mode, I am not currently concerned about cash and debt. If the company stops trying to expand, it could pay off its long-term debt in about two quarters. The thesis here is expansion is good, so despite the strong cash flow, there is likely to be some increase in debt in the coming year.
Guidance, 2022 and beyond
Guidance is what wowed investors listening to the Q4 conference call. Long term, post 2024, the company is projecting non-GAAP EPS growth of 11% to 13% per year. Slide 90 from the presentation breaks it down:
The caveat is that growth in EPS will be slower roughly through the end of 2024. One question for investors is whether to invest now and take the dividend, or wait to see if growth really does take off in 2025.
Walgreens’ aim is to build the pharmacy and healthcare organization of the future by being a low-cost provider of a multi-channel healthcare experience. Acceleration of growth will allow it to expand its care model, in turn lowering costs. Customer loyalty will be assured by a combination of quality of care, convenience, and low cost. This may extend beyond individual customers to insurers that want to keep their own costs down. There are several aspects to this program, in addition to the current physical locations. Currently the internet side of possible synergies are represented by digital and curbside sales plus the myWalgreens customer loyalty program. Probably the major propellers of increased revenue, margins, and profits would come from healthcare services, including by Shields and VillageMD.
Digital, Curbside, and MyWalgreens
Curbside and drive-through pickup contributed to strong digital growth in the fourth quarter. myWalgreens membership increased to 85 million members, up sequentially from 75 million members. Digital and curbside, drive-through, and delivery orders completed had passed 23 million. These digital sales more than doubled y/y. Walgreens is also introducing a Health Corner app to help customers navigate the healthcare marketplace. That pairs with physical Health Corner locations in stores and other physical spaces. Walgreens expects to have over 100 Health Corners by year-end 2022, 1,200 within 5 years, and 3,000 when fully built out. WBA also launched the Scarlet bank account and debit card nationwide.
Shields majority investment
In September, WBA announced a majority investment in Shields, an industry leader in integrated specialty pharmacy care. This will help Walgreens’ customers and partners to coordinate care for complex, chronic, and often expensive conditions. The investment was $970 million and gave WBA 71% ownership. WBA also has an option to acquire full ownership. WBA believes Shields can improve patient care while reducing total costs. Shields currently serves over 1 million specialty patients and has over 70 health system partners. The current management of Shields will continue to manage the company. WBA’s strategy of acquiring minority and majority stakes in companies while retaining management is intended to keep each entity at the top of its game.
Walgreens has increased its stake to 63% of VillageMD. VillageMD operates more than 200 clinics with its own physicians and medical staff. Walgreens said the investment will enable it to open doctors' offices at 600 or more of its drugstore locations by 2025, and a total of 1,000 by 2027. VillageMD already serves 1.6 million patients. See also Walgreens' $5.2 billion VillageMD investment.
In addition to VillageMD, Walgreens is building other specialties for customers. Infusion therapies are available through Option Care. Complex and home care solutions are available through BrightSpring. CareCentrix is focused on post-acute or hospital care; Walgreens’ stake in it is now 55%.
Walgreens announced a dividend increase in July. Walgreens has paid a dividend for 355 straight quarters (more than 88 years) and raised the dividend for 46 consecutive years. The current quarterly rate is 47.75 cents per share, or $1.91 per year. At a price of $50.00, that gives a yield of 3.8%. I believe the risk to the dividend is low and that the dividend may see significant increases starting in 2025 if all goes according to plan.
A plan is a nice thing. But nothing guarantees that even the best-laid plan will work. It is conceivable that Walgreens could use considerable cash, that could have been paid out to shareholders, to invest in a business model that turns out to be not as profitable as projected, or even disastrous. We always have macroeconomics to consider. There are no guarantees that consumers will act the way that Walgreens projects. The same is true of the doctors hired and other employees. Congress may shift the very rules under which all healthcare assumptions are made. Other players, particularly competitors, are not apt to surrender market share without a fight. What seems reasonable now, in an investor slide show, may not seem realistic when 2024 or 2028 rolls around.
I like Walgreens’ new direction. One concern I have about investing in retail is the typical low profit margins. The new plan addresses that concern. Since I have already stated the caveats clearly, my conclusion is that for long-term investors, those capable of thinking out to 2026 and beyond, the potential rewards seem quite remarkable. What effect that will have on the swarm of bots and short-term traders that do most of the daily stock trading is beyond my ability to predict. As the quarters roll by, I will be watching for execution, but I will not be surprised with the occasional delay or missed projection. Even if, by 2026, WBA hits the low end of its growth rate guidance, the stock is worth investing in now, collecting the dividend over the next couple of years, and having a fair shot at outsized returns at whatever point institutional investors conclude events are going according to plan.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of WBA, BMY, GILD, SBLK either through stock ownership, options, or other derivatives. 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.
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.