The real-money Inflation-Protected Income Growth portfolio owns shares of Walgreen (NASDAQ:WBA). Walgreen, like every company in that portfolio, earned its place because at the time it was purchased:

  • Its shares appeared to be reasonably priced.
  • Its balance sheet looked solid.
  • It had a covered dividend with a history of increases.
  • That dividend looked capable of continuing to rise.
  • The company fit reasonably well within the portfolio from a diversification perspective.

Still, just because a company fit a portfolio at one time doesn't mean it will fit forever. This article reviews the current state of several of the key factors that made Walgreen worth owning and calls out the one that has put it on the bubble, at risk of losing its spot in the IPIG portfolio.

Walgreen

Balance sheet
Walgreen's balance sheet remains solid, with a debt-to-equity ratio around 0.3. That reasonable debt-to-equity ratio gives the company the flexibility to manage through the ups and downs in the economy while still remaining strong. In addition, the company has more than $969 million in cash on its balance sheet, which positions it well for servicing its existing debt while continuing to reward shareholders.

Result: Hold, based on balance sheet.

Dividend
Walgreen currently pays a quarterly dividend of $0.315 per share, where it has sat for the past three quarters. Dividend growth is an important characteristic that the IPIG portfolio actively seeks, and Walgreen has a 38 year history of raising its dividend. In addition, with a payout ratio at 41% of its earnings, the company has room to continue that streak as its business continues to grow over time.

Result: Hold, based on dividends.

Valuation
Based on a discounted cash flow analysis, Walgreen's business looks to be worth around $51.6 billion, which, unfortunately, is about 19% below its recent market capitalization of $63.7 billion. Because the company's market capitalization is that much higher than what the IPIG portfolio views as a fair value estimate, its shares are nearing a point where it may be time to sell them.

Nevertheless, the company will be reporting earnings on March 25, and if the report is strong, the company's fair value estimate may increase. After all, any fair value estimate is based on projections of an unknown future, and nobody has the ability to predict it exactly correctly. The IPIG portfolio's valuation is an estimate based on publicly known data and expectations, and if that information changes, so will the estimate.

Result: On the bubble, based on valuation. If its share price rises above $72 before earnings are released later this month, the iPIG portfolio will consider selling. Otherwise, the IPIG portfolio will reevaluate after earnings.

All told: a great company with a valuation that looks rich
Looking at its valuation, its balance sheet, and its dividend, Walgreen still looks like a great company, but one where its market price may have simply gotten ahead of the fundamentals of the business. A valuation focus helps keep the IPIG portfolio centered on what really counts when the market moves stock prices around, but it does mean the portfolio may need to part ways with a great company from time to time.

In Walgreen's case, that time may be here fairly soon. Still, unless its shares continue to rise before its earnings are announced, it's a company the portfolio remains happy to hold.

 

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Chuck Saletta owns shares of Walgreen. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.