Dividend Aristocrats

Study Walgreens Stock & 43 Year Dividend History

Walgreens Stock is a member of the esteemed S&P 500 Dividend Aristocrats index; 57 companies that have consistently paid and raised dividends for at least 25 years. Walgreens paid its first dividend in 1990 and has since increased it annually.

Management has a simple mission statement: to help people live healthier and happier lives. It is the largest pharmacy and well being retailer in the United States and Europe with 18,750 locations in 11 countries. It was founded in 1901 by Charles R. Walgreen with a single store in Chicago.

According to its 2018 annual report, the company has 400 distribution centers which supply health products to over 240,000 pharmacies, doctors’ clinics, health centers and hospitals.

In this article, we provide a synopsis of Walgreens Stock, review of 2018 annual report and financials, dividend growth history and long term performance versus S&P 500.

Business Synopsis

Walgreens interacts with 8 million customers each day in its stores as well as through online channels. Some of its retail brands include Walgreens, Duane Reade and Boots & Alliance Healthcare in UK.

Each Walgreens store has an average size of 13,500 square feet featuring 23 employees working at any given time.

Senior Management believes prescription drugs are an important component of peoples’ lives and first line of defense for medical conditions.

Therefore, a pharmacist’s instruction and advise on how to use a specific prescription is essentially “Amazon proof.” The company has a positive outlook on prescription drug usage due to:

Reason #1: Aging population in America. According to US Census Bureau, there will be 94.7 million Americans over the age of 65 by the year 2060. As of 2016, this number stands at 49.2 million. This represents a 92.5% growth.

Reason #2: Increases in life expectancy. According to the World Bank Organization, life expectancy in the United States has increased from 69.77 years in 1960 to 78.5 as of 2019.

Reason #3: Increases in availability of generic drugs which are cheaper than branded and exclusive health products.

Walgreens Boots Alliance trades on the Nasdaq Stock Exchange under WBA ticker. The company has a market capitalization of $50.23 billion along with a dividend yield of 3.25%. The dividend yield is 145 basis points higher than that provided by the S&P 500 index, which is at 1.8%.

For fiscal year 2019, Walgreens Boots Alliance earned $136.87 billion in sales with net earnings of $3.98 billion, implying a net profit margin of 2.9%. This was a 4.1% growth in organic sales over 2018 sales which stood at $131.5 billion.

Walgreens reports its sales figures in 3 operating segments and below is a snapshot of the company’s performance for 2019, compared with 2018.

For fiscal year 2019, Retail Pharmacy USA had sales of $104.532 billion growing 6.7% year over year.

Retail Pharmacy International had sales of $11.462 billion with sales declining 6.7% year over year. Reasons for this are a 4.5% adverse currency impact due to a strong US dollar versus emerging market currencies and the Euro. As well, organic sales declined 2.1% for Alliance Boots UK.

Pharmaceutical Wholesale had sales of $23.053 billion, growing 0.2% year over year.

More than ¾ of total sales are derived from Retail Pharmacy USA, leaving for huge growth opportunities in International markets as Retail Pharmacy International only accounts for 8.4% of total sales.

  • Some headwinds facing the company include a strong US dollar which makes earnings from its International operations less profitable as weaker foreign currencies are converted back to US dollar.
  • As of August 2019, 78% of America’s population lives within 5 miles of a Walgreens, Duane Reade or a Rite Aid store creating tremendous competitive advantage for the company.

Market Share, Growth & Operating Margins

Walgreens’ total prescription market share in the US stood at 21% as of August 31st, 2019. This was down 0.55% from a year ago due to store optimization which essentially means the closure of its 200 stores as part of a drive to cut costs and achieve $1.8 billion in annual savings by the year 2022.

The 4.1% growth in Walgreens Consolidated sales was attributed by management to higher brand inflation and growth in prescription volumes. Walgreens filled 283 million prescriptions in 2019, a 1.2% increase from 2018.

So what is the outlook for 2020? In its 2019 earnings press release, management quotes, “The company today introduced guidance of roughly flat growth in fiscal 2020 adjusted earnings per share at constant currency rates, with a range of plus or minus 3 percent. Excluding the impact of lower fiscal 2019 bonus payout, this expected performance represents a year-over-year increase in the mid-single digits.”

Poor Performance of Walgreens Stock due to Amazon

Starting early 2017, Walgreens stock has significantly under performed the S&P 500 by over 100%. The reason for this is Amazon’s acquisition of Pillpack for $753 million in early 2018. Pillpack, and it’s catch phrase “Pharmacy Simplified” delivers customers’ prescriptions to their doorsteps by coordinating with doctors, scheduling shipments and ensuring important prescriptions are filled automatically each month.

This way, customers avoid standing in lines, waiting half an hour for their prescriptions to be filled while getting free shipping from the company. Pillpack is able to provide free shipping because it does not have huge real estate costs like Walgreens does.

Amazon’s acquisition of Pillpack puts a significant threat to the survival of Walgreens as more customers might start buying their prescriptions online versus visiting a Walgreens outlet. So what is Walgreens doing to combat this threat? In its 2019 investor presentation in the Retail Pharmacy USA Initiative Update, the company explains its digitization efforts to boost Ecommerce sales and compete directly with Amazon.

  • Walgreens app has been downloaded 58.9 million times, up 11.8% from 2018.
  • Ecommerce sales hit over $15 billion for 2019, up 24.9% from last year.
  • Build direct to consumer websites like No7Beauty.com.
  • Walgreens is moving its data to Microsoft Azure Cloud which will help in improved engagement between healthcare providers, pharmacies and insurance companies to fill a customer’s prescription quickly.
  • Walgreens has also partnered with FedEx to provide next-day prescription delivery for $4.99.
  • Walgreens achieved strong sales growth on Boots.com with sales up 14.4% year over year.
  • Boots is UK’s largest pharmacy, health and beauty products chain with over 2500 stores.
  • Walgreens has 90 million Balance® Rewards active members as of August 2019. With Balance Rewards, consumers can earn points with each purchase on Walgreens.com, e.g. 10,000 points is equivalent to $10 off your purchase.

Performance of Walgreens Boots Alliance (WBA) Stock

Below is a long term monthly chart of Walgreens Boots Alliance. The stock traded at $2.24 on January 1st, 1987. As of October 30th, 2019, the stock is trading at $55.86. This is growth of 2500% over a period of 32 years, averaging a compounded annual growth rate of 10.5%. Walgreens stock traded as high as $96 in July 2015 which marked the highest price ever recorded for the stock.

However, as sales growth has slowed and Amazon is entering the prescription business with its acquisition of Pillpack, as well as the general decline of brick & mortar stores, the stock has dropped from $96 in July 2015 to $56 in October 2019.

Dividend History, Sustainability and Payout Ratio

Walgreens Boots Alliance is a member of the S&P Dividend Aristocrats Index, a prestigious group of companies that have not only paid consecutive dividends for at least 25 years, but also raised them. These companies must have at least $3 billion in market capitalization and are included in the S&P 500 Index.

From its Investor Relations website, oldest dividend data goes back to 1990. Walgreens paid $0.04 in dividends per share in 1990 and in 2018, paid $1.68 in dividends. That is a jaw dropping 4200% increase in 29 years. It translates to average compounded annual growth rate of 13.8%.

Below is a chart showing the steady uptrend in Walgreen’s dividend payments.

Below is a chart showing annual dividend increases in terms of percentage growth year over year. During the 2008 to 2010 financial crisis, Walgreens drew its dividend 17%, 19% and 24% respectively, proving that it is a recession proof business and people will still fill their prescriptions during bad economic times.

You might notice Walgreens is now growing its dividend in mid single digits since 2015 due to the meteoric rise of Amazon.

Measuring the Dividend Payout Ratio

Walgreens Boots Alliance has paid dividends for the past 43 years, and grown them every year. How awesome is it to be able to invest in a company from which you fill your prescriptions and get rewarded with dividend and share price growth to the tune of 13.8% compounded annualized growth rate over 29 years.

Walgreens is one of the best dividend paying stocks with strong business fundamentals, medical products that people will always need, huge opportunity to add stores outside of the United States as well as grow its Ecommerce business.

Lets examine the the dividend payout ratio for this company. Dividend Payout Ratio measures how much of a company’s free cash flow is paid out in the form of dividends. Free cash flow is the cash a company generates from its daily operating activities minus capital expenditures like investing in new plants or equipment. Free cash flow is calculated from the statement of cash flows, and is not artificially modified using accounting rules or non-cash expenses like depreciation, amortization, fair value revaluations, etc.

In its 4Q 2019 Investor Presentation, Walgreens discloses full year 2019 cash flows from operations at $5.594 billion minus capital expenditures of $1.702 billion. This leaves free cash flow at $3.893 billion.

For fiscal year 2019, Walgreens paid out $1.643 billion in cash dividends. Knowing this information, what is the dividend payout ratio?

Dividend Payout Ratio = Total Dividends Paid / Free Cash Flow

Dividend Payout Ratio = $1.643 billion / $3.892 billion

Dividend Payout Ratio = 42%

A dividend payout ratio of 42% is very strong and leaves room for future dividend increases.

Walgreens (WBA) Performance and Valuation versus S&P 500 and XLP

As of October 2019, Walgreens Boots Alliance (WBA) stock is down 17.5% year to date, versus the S&P 500 which is up 21.5%. The S&P 500 trades at a forward price to earnings ratio (Forward P/E) of 17.1 times while Walgreens  trades at a forward p/e of 9.21.

How are we making this calculation? For the full year 2019, Walgreens  is expected to generate earnings per share of $5.95. The stock currently has a price of $54.78 as of the time of this writing. Therefore:

Forward Price to Earnings Ratio = Stock Price / Forward 12 Months Earnings per Share

Forward P/E = $54.78 / $5.95

Forward P/E = 9.2 times earnings

As a comparison, the S&P 500 Consumer Staples (XLP) Index trades at a forward price/earnings ratio of 19.8 times.

Has Walgreens Boots Alliance (WBA) Under Performed the S&P 500 Over Past 10 Years?

Below is a chart showing the performance of Walgreens Boots Alliance compared with performance of the S&P 500. Since October 2010, the S&P 500 is up 193% while Walgreens has been left behind in the dust returning a disappointing 80.17% gain.

However, Walgreens was outperforming the S&P 500 up to early 2017 when it was up a cumulative 170.71% while the S&P 500 was up 137%.

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