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Walgreens Vs. CVS: If Peter Lynch Picked Dividend Stocks

Apr. 08, 2023 10:26 AM ETCVS Health Corporation (CVS), WBA90 Comments


  • Peter Lynch is best known as a growth investor, not a dividend investor.
  • However, he has been very successful with dividend stocks too in his career. His writings have shared his selection criteria extensively.
  • Some of his criteria are very insightful, such as the importance of the PEGY ratio and inventory management, even to seasoned DGIs.
  • This article evaluates Walgreens and CVS using Lynch's approach and concludes that WBA is the more attractive dividend stock.
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Sales papers for various retail stores



Despite being renowned as a growth investor, Peter Lynch has been very successful in picking dividend stocks also. And he has shared valuable insights extensively throughout his career and writings regarding the selection of dividend stocks. While some of his advice

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This article was written by

Envision Research profile picture

Envision Research, aka Lucas Ma, has over 15+ years of investment experience and holds a Masters with in Quantitative Investment and a PhD in Mechanical Engineering with a focus on renewable energy, both from Stanford University. He also has 30+ years of hands-on experience in high-tech R&D and consulting, housing sector, credit sector, and actual portfolio management.

He leads the investing group Learn more.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of WBA 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.

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Comments (90)

Maxlzzp profile picture
Retired. Added CVS at ~$70. Significantly undervalued. 3.5% Yield. M* has 5* rating $113 price target ...just waiting for those new businesses to fully integrate.
ckarabin profile picture
The problem with Walgreen is that they are far too dependent on that drug store business. Profits in that are going away as the insurers squeeze their margins and refuse to pay much for dispensing prescriptions. It ain't like the old days!
AJC1 profile picture
CVS owns Aetna. Healthcare insurers (UNH , ELV) command much higher multiples and stability. IMHO, CVS at almost the same multiples is undervalued vs WBA.
European investor 99 profile picture
@AJC1 not sure what you’re implying but walgreens just acquired similar health care providers. Hence the debt and negative eps recently. Do i miss something?
Murad Shawar profile picture
@Stock nomad Yeah WBA didnt aquire AETNA and SIGNIFY HEALTH and OAK STREET HEALTH . wba is dumpster stock sell and roll in to CVS man
European investor 99 profile picture
@Murad Shawar
hmm but they did acquire others right?

Actually did the opposite. Sold my CVS with good profit and reinvested into WBA.
al_chemyst profile picture
Literally, every time I go to CVS...

They are totally different companies and are not comparable stocks. Writers (who own Walgreens) on here have been making this mistake for the last 5 years. CVS competes with Walgreens on less than 25% of their business and it is a declining portion of their business. Good luck with your WBA investment.

WBA buys Boots and RAD stores while CVS buys healthcare delivery and insurance. I think I prefer the management of CVS with my money over WBA.
Under risk, I don't see any discussion of the effects of PBM changes coming thru Congress. If severely restricted CVS Could lose significant earnings overnight.
R d B
20 Apr. 2023
@Seawolftoo yes, for now the pbm is a serious advantage. However, if people knew how unfair the pbm business practices are and what kind of risk the unravelling of that advantage poses then it could be aliability
ckarabin profile picture
@Seawolftoo CVS only makes 4% on sales in its PBM business. What excess profit is Congress after?
peace 2 u profile picture
@Envision Research

1. I do not believe that it is fair/proper to claim to use a system when you alter it. You are either using a system or not. Otherwise, that simply appears to be "name dropping" to collect readers.

2. I suspect that you have a system which may give good results and/meaningful information. I believe that it was Peter Lynch who said, "Invest in what you know." If I recall my history correctly, Peter Lynch made a fortune in investing in pantyhose for women when the product first came out. It was a product that women "wanted"; which frequently had to be replaced. Do you really understand the consumer drug store market/product or are we just getting statistics?

3. There are a few, easily useable, metrics which generally provide good results, e.g. earnings per share, investment in research and development, percentage of market share in a particular area/field, percentage of repeat customers, inventory turnover. Not everyone will apply to every company.

4. I cannot understand how PEGY provides a meaningful/investible result--there appear to be too many assumptions stacked on top of each other.

5. I expect an author to provide the author's perspective. If the author is speaking about Peter Lynch's style, I would expect the article to "pull out" a new/better understanding of his material. I simply do not see that in this article.

6. I suspect that you have a meaningful/valuable method of investing; I am unable to figure what you are trying to say as you keep touching back to Peter Lynch.

7. If the earnings per share continue to rise year after year, that would be a company worth looking at. If it expends a high percentage of its income on research and development, e.g. Cummins (CMI) or Corning (GLW) or possibly Tesla, it is a company which is working on next year's new product. Amazon is a company which keeps trying to increase the number and amounts of purchases from it.

8. I would appreciate an article which tells me your formula for success in investing. I would not appreciate one which says, "sign up with us to learn the "secret of investing".

Just a thought or two.
AlphaElephant profile picture
CVS is a far more diversified and robust business than WBA. I owned WBA for years until they bought Boots and growth stalled. Then I sold.

Later I bought CVS in the low 50’s. I expect to buy more in the low 70’s if it gets there.
09 Apr. 2023
There was one of these articles awhile back -- why "versus", just buy them both.
Recently started CVS down in low $70s....
dlevine007 profile picture
There is another Peter Lynch factor that is not mentioned in this article - that the investor should go to a CVS and a Walgreens and get a feel for them. On that score, Walgreens seems far better run and I personally go there for my prescriptions. CVS in my area is not in the same league. I am long WBA.
AlessandroDiRoma profile picture
@dlevine007 It's the opposite where I live. That's the problem. And an argument for buying some of both.
Alan Brochstein, CFA profile picture
@AlessandroDiRoma Really both of you are very wrong in the way you go about this in my view. It doesn't really matter which one is better to YOU. We are all very minor customers.
Towmotor488 profile picture
I like them both..
WBA seems more attractive than CVS, however Imo still nowhere near attractive enough to buy the stock. I would much rather buy additional shares of SBSW, SBLK, or Polymetal at current prices. US citizens are not allowed to buy Polymetal shares(POLY.L on the London Exchange) now, as the company gets over half their revenue from Russia. Polymetal plans to change their domicile from Jersey(UK) to Kazakhstan, so that they could spin off the Russian assets into a separate company. Imo those investing in Polymetal shares now might more than triple their money over the next two years. I bought many Polymetal shres at around $3 while it was still trading n the US.
Alan Brochstein, CFA profile picture
@6228371 Nowhere near attractive enough to buy? Wow, I disagree. The stock is down a lot over the last year, three years, five years and even 10 years. Was it THAT expensive beforehand?

As I discuss below, I just exited the name, and I can find cheaper stocks that I do own, but WBA is very attractive in my view. The stock trades at just 0.4X enterprise value to projected FY23 revenue. 5 years ago, it traded at 0.6X. The EV is just 8.3X projected 2023 levels of EBITDA. It was 9.0X five years ago. The PE for FY23 is just 7.9X, which is low and down from 11.4X the FY18 ending PE.

Margins have come down, but debt has been stable at $13 billion currently. I think this level is manageable.
@Alan Brochstein, CFA

Retail stocks in general are out of favor now, and the pharmacy sector seems more out of favor than most of retail. Tangible book value is negative. How did this happen? Was it making high priced acquisitions, or repurchasing shares at high prices? I prefer to invest in a mining company that has more cash than debt. I don't see any upside catalyst for WBA, so it seems poorly suited as a stock to trade. Is your idea just to hold it long term and collect the dividends? I don't get it. There are so many stocks that seem more interesting.
Alan Brochstein, CFA profile picture
@6228371 lol, your question proves that you don’t know me. Again, I don’t own it now. I don’t generally buy and hold.
George Fisher profile picture
Interesting analysis. I have two comments:
1) If Peter Lynch's formula is being touted in the title, in the the bullet points, in the body of the analysis, and as part of the recommendation, why is it you use something other than the actual formula? Lynch's PEGY has always used Earnings per Share Growth, which over the past 5 years has been "NM not meaningful" for WBA (10-yr NM, 3-yr NM) and -8.8% for CVS (10-yr 0.7%, 3-yr -14.3%), per SA tables. To arbitrarily replace earnings growth with dividend growth in a famous and well know formula, and to still refer to the end results as the same as Peter Lynch's PEGY, could be considered a misrepresentation. In reality, with the numbers provided by SA, the actual Lynch PEGY formulas would have resulted in either "no number" or a "NM" result.

2) I take the Buffett approach to share buybacks, and have for well over 20 years. It is not not the number of shares bought back but the number of shares retired and withdrawn that is important. Buying back shares on the open market to recycle them to executives to fulfil management options is a poor use of shareholder operating cash flow. What matters is an actual reduction in shares outstanding. According to ValueLine for shares outstanding and YCharts for quarterly $ spend on share buybacks, from Dec 2018 to Dec 2022, CVS shares outstanding went from 1,295 million to 1,315 in 2022. Dec 2012, CVS had 1,234 shares outstanding. WBA was a bit better with 941 million outstanding in 2012 to 952 in 2018 to 864 in 2022. What has shareholders and investors gained from the referred to "buyback yields"?

FD: Long CVS
@George Fisher The growth rate is the estimated future growth rate. Looking at the past will only tell you so much. If investing were so formulaic and a function of past financial performance, everyone would be rich.
George Fisher profile picture
@Corneroffice PEGY = (current price / “earnings”) / (projected 5-yr earnings growth + “dividend growth”

The interesting question then becomes which “earnings” and which divy “growth” to use. Latest reported annual earnings? TTM earnings? Projected earnings? GAAP or Non-GAAP earnings, reported or operating earnings? Is the divy growth 1-yr, 3-yr, or 5-yr?

I have used the “forward PEG Ratio” in my due diligence since before it got a name. Way before the internet in the 1970s, I would search VL in the library looking for “value”. Besides Forward PEG, another measure I used was to compare current reported PE to anticipated 3-5 yr PE with the anticipation of locating stocks with expected expansion of their multiples.

I still don’t understand why the author changed the formula to use dividend growth over the Lynch formula of earnings growth, but yet keeps the description as a comparison of a popular Lynch value criteria, which it clearly is not.

I am not against using a formulaic approach to certain aspects of stock selections. Personally, I have developed what I call the “Guiding Mast Number”, used in my newsletter Guiding Mast Investments. I have utilized this formula since the late 1990s. This formula uses forward PEG ratios using 2024 operating earnings estimates, 5-yr anticipated earnings growth, 10-yr history of dividend and earnings growth as reported by the CFRA Quality Rating, forward dividend yield based on most recent quarterly dividend, 2024 earnings yield, and current broker timeliness consensus. I run these numbers for around 135 stocks every month as the basis for further research.
17939962 profile picture
I would like to make a comment about share buybacks : I hate them! My attitude is that a company buying back its own shares is indulging in a shell game. What makes the company the best judge of the value of its own shares? A rhetorical question : if company XYZ is undervalued, and over-valued company ABC has surplus cash, why wouldn't the management of ABC be required to buy XYZ rather than its own shares? That is obviously impractical, because the shareowners who initially bought shares in ABC weren't looking to invest in a mutual fund or ETF! Carried to a logical conclusion the company which keeps buying back its own shares will eventually (theoreticaly) own zero shares. More likely the company winds up with a limited number of shares owned primarily by management interests : in other words the company becomes a private corporation. I feel that legislation should be initiated to forbid the use of surplus cash to buy back shares. It is a corrupting influence in the markets, and makes it difficult to evaluate the performance of a company because of the distortions that result in financial ratios from year to year.
Go595lf profile picture
Thanks for the article and analysis of CVS and WBA. I read it with interest but unfortunately dis not get what was the recommendation (??).
BuddhaLove profile picture
I own both.
Neither CVS nor WBA profit margin has changed much, CVS in spite of adding much debt to expand. I don't really understand the synergies of an ins. co. added to a pharmacy co. WBA is focused on making their core business better, more efficient. WBA at a cheap price during a recession seems like a better bet.
toddprof-LMT profile picture
@research550 “…don't really understand the synergies of an ins. co. added to a pharmacy co.” It forced our family to get prescriptions filled at CVS because we are under Aetna Insurance, which we hate because we hate CVS compared to Walgreens, at least where we live, and previously good experiences at Walgreens. I don’t like being forced into doing business with a particular company over another I prefer more. Feels like communism. Every bad experience we have with any prescriptions at CVS just magnifies it. In all fairness, hard to say if WBA is better in their pharmacy, haven’t been there in so long. CVS pharmacy seems like a Chinese sweat shop.
user anita profile picture
@toddprof-LMT I was about to answer the same thing. I bought cvs when they bought Aetna, because I thought that would happen, and thought the vertical integration was smart. Didn’t realize how much I’d dislike shopping at CVS though. What a poorly run pharmacy in my area.
I’m in the black, but would like to see some recovery in share price before I sell.
toddprof-LMT profile picture
@user anita As of today WBA makes up 5.46% of our portfolio, CVS makes up .03%. Shop on occasion at WBA, never shop at CVS and try to avoid.
Boston Value Guy profile picture
CVS has been destroying value for the last 10-15 years. Add up the cost of all of their bad acquisitions and you will come up a number less than the current market capitalization. Total disaster.
jayridescarbon profile picture
While we have a very small position in WBA with a significantly larger position in CVS, the recent pathetic dividend growth at WBA makes it a nonstarter for us as far as adding.
@jayridescarbon dividend yield is higher than a Treasury who cares how much they raise it. Wba better
Simon_JPS profile picture
"the PEGY ratio, which is defined as the P/E ratio divided by the sum of the earnings growth rate and dividend yield"

"To compute the PEGY ratio, we first need to estimate the earning growth rates. Here I will use the 5-year growth rate of their dividends to represent the earnings growth rates."

Respectfully, by reading those two sentences at face-value, it appears in the second one you used a novel way to calculate PEGY ratio, using dividend growth instead of earnings growth.
jarhead999 profile picture
Totally agree with Tippsology. CVS vastly more triggered to health care.
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