Friday, September 23, 2011

Walgreen (WAG) Dividend Stock Analysis 2011

Walgreen Co. (WAG), together with its subsidiaries, engages in the operation of a chain of drugstores in the United States. The company’s drugstores sell prescription and non-prescription drugs, and general merchandise. Walgreen is a dividend aristocrat which has paid uninterrupted dividends on its common stock since 1933 and increased payments to common shareholders every year for 36 years.

The most recent dividend increase was in July 2011, when the Board of Directors approved a 28.60% increase in the quarterly dividend to 22.50 cents/share. Walgreen’s largest competitors include Wal-Mart (WMT), CVS Caremark (CVS) and Rite-Aid (RAD).


Over the past decade this dividend growth stock has delivered an annualized total return of 1.40% to its shareholders.

The company has managed to deliver a 10.50% annual increase in EPS since 2001. Analysts expect Walgreens to earn $2.62 per share in 2011 and $2.99 per share in 2012. In comparison Walgreen earned $2.12 /share in 2010. The company has managed to consistently repurchase 0.50% of its common stock outstanding over the past decade through share buybacks.

Future earnings growth will be fueled by new store openings, acquisitions as well as store remodeling and improved internal growth strategies. Walgreens expects to increase comparable stores count by 2.50% – 3%. The recent acquisition of New York based Duane Reade for $1.1 billion in 2010, provided Walgreens with 257 pharmacies and 2 distribution centers. Store renovations, improving the product mix, and increasing inventory efficiency will add to profitability, as will realizing synergies from acquisitions such as the Duane Reade one. The company’s recent acquisition of Drugstore.com, will pave the way for expanding the company’s web presence.

The return on equity has decreased to 14.50% after reaching a high of 19% in 2007. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 17.30% per year over the past decade, which is higher than the growth in EPS.

A 17% growth in distributions translates into the dividend payment doubling almost every 4 years. If we look at historical data, going as far back as 1980, we see that Walgreen’s has actually managed to double its dividend every five years on average.

The dividend payout ratio has doubled from 16% in 2001 to 30% in 2010. The reason behind this increase was the fact that dividend growth exceeded earnings growth over the past decade. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Walgreen’s is trading at 14.30 times earnings, yields 2.50% and has a sustainable dividend payout. The company rarely yields more than 2.50%, so I view the current weakness in the stock price as a good opportunity to add to my position.

Full Disclosure: Long WAG

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3 comments:

  1. I enjoy your website quite a bit.

    Your review of WAG doesnt mention the big contract dispute with Express Scripts (which could decrease 2012 EPS by 0.20-0.25) if the contract is lost in 3 months.

    Walgreens derives 2/3 of sales from pharmaceuticals. Competitors like Walmart, Target and the others with $4 generic scripts can take a loss on the drugs to increase store traffic.

    Also mail-order pharmaceutical delivery increases every year.

    Since the CVS+Caremark merger, CVS has outpaced Walgreens same-store sales growth for the past 2+ years.

    If Walgreens wasnt so reliant on their pharmacy for sales I would be more optimistic.

    Even at the current dip in stock price, not sure how good of a long-term investment this is.

    I look forward to your comments.

    ReplyDelete
  2. What is your opinion of WAG at this time? Time to buy? Have you added to this position lately?

    ReplyDelete
  3. Definately a good time to buy now the price may dip a bit more but if they acquire Rite it should start to slowy rise again..

    ReplyDelete

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