3 Things to Watch With Walgreen

Walgreen (NYSE: WAG  ) operates a chain of drugstores in the United States, selling prescription and non-prescription drugs, as well as carrying various household items and consumer goods.

Today, let's look at three things investors should be watching regarding Walgreen, as they will provide us better insight into the company.

1. Walgreen's relationship with Express Scripts
Quick, everyone think of the awkward encounter you've had with a former love after running into them for the first time in years -- that appropriately sums up the touch-and-go relationship between Walgreen and pharmacy-benefits management provider Express Scripts (Nasdaq: ESRX  ) at the moment. Although the two signed a multi-year agreement that will again allow Walgreen customers to fill their prescriptions through Express Scripts beginning again in September, a decent amount of attrition was suffered on Walgreen's end as consumers split for CVS Caremark (NYSE: CVS  ) or Rite-Aid (NYSE: RAD  ) .

Express Scripts' latest quarterly report didn't indicate much of a shortfall from its spat with Walgreen, but Walgreen's results were definitely lacking. Maintaining a healthy relationship with Express Scripts going forward will be a key to Walgreen's success.

In order to try and regain some of its lost customers, Walgreen is also going to be introducing a loyalty rewards card in September. It won't be easy to regain those lost customers, as CVS and Rite-Aid both have loyalty rewards as well, and the addition of loyalty rewards could negatively impact Walgreen's margins and promotional activities, but it's a necessary evil.

2. Affordable Care Act and acquisitions
Rising health care costs are squeezing every aspect of the medical chain, from patients to physicians. In order to combat the rising costs of medical care, Walgreen has turned to acquisitions and symbiotic partnerships to diversify its reach and lessen its costs.

Earlier this year Walgreen made a rather unpopular investment of $6.7 billion in Alliance Boots in order to become the world's first pharmacy-driven health and wellness retailer. The move was unexpected and pricey, but it's expected to pay immediate cost synergies and increase EPS by $0.23-$0.27 just within the first year. Walgreen also offered last month to purchase Stephen L. LaFrance for $438 million to add to its string of local drug store purchases.

In addition to acquisitions, Walgreen is forging partnerships with its physicians and health insurers. As health care costs have risen and Medicaid spending has fallen, health insurers like UnitedHealth Group (NYSE: UNH  ) have pushed the likes of physicians, pharmacy benefit managers, and drugstores to form what are known as Accountable Care Organizations. Under President Obama's Affordable Care Act, which takes effect in 2014, it gives these ACOs the right to form pacts and form contracts with the Medicaid program. The overall effect of this should be lower costs for all those involved.

3. Dividends, dividends, dividends!
Let's face it: One of the primary reasons for owning Walgreen is the fact that it's raised its dividend for an incredible 37 consecutive years. Walgreen's current yield of 3% completely puts its peers to shame. CVS Caremark's current yield is less than half of Walgreen',s while Rite-Aid shareholders get zilch thanks to its debt-riddled balance sheet.

Source: Dividata. *Assumes $0.275 quarterly dividend.

Therefore, Walgreen's continued dividend growth stands as not only a major reason to buy the company, but also serves as an indication of its fiscal health. As long as it can capitalize on its acquisitions and utilize newfound strength in generic drug prescriptions (which are helping to expand its margins), there's little reason to be believe Walgreen's dividend won't continue to tick higher.

Foolish roundup
Now that you know what to watch for, it should be easier to analyze Walgreen's successes and failures in the future and hopefully give you a competitive investing edge.

If you're still craving even more info on Walgreen, I would recommend adding the stock to your free and personalized watchlist so you can keep up on all of the latest news with the company.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Express Scripts Holding. Motley Fool newsletter services have recommended buying shares of Express Scripts Holding and UnitedHealth Group. The Motley Fool has a disclosure policy.
We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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