Why Growth and Income Investors Should Consider Drugstores

Investors are primarily grouped into one of two camps: those who prefer the volatility-reducing downside protection of dividend payments, and those who shy away from dividends and instead prefer the greater capital gain potential of growth stocks. When a specific industry contains stocks that cater to either group, investors would be wise to dig deeper. That's exactly the case with the major pharmacy chains in the United States, and it's why investors should consider Walgreen (NASDAQ: WBA  ) , Rite Aid (NYSE: RAD  ) , or CVS Caremark (NYSE: CVS  ) .

A drugstore to suit your investing desires
No matter what you prefer from your equity investments, there's a drugstore for you. CVS is firing on all cylinders right now, and there doesn't seem to be any reason the company's success can't continue. In the last fiscal year, CVS registered 15% revenue growth and 18% growth in diluted earnings per share, and the results to begin the current fiscal year are equally encouraging. Diluted earnings per share over the first half of the year are up another 25%, year over year.

Rite Aid is a turnaround story. This means compelling potential for strong capital gains should the turnaround materialize as planned, but it of course leaves investors at greater risk should the company's efforts fall short. Unsurprisingly, Rite Aid is much more volatile than its larger, more established industry peers. At the same time, the results up to this point are hard to argue with.

Rite Aid was a $1 stock as recently as the end of 2012. Its performance since then has been nothing short of spectacular. Rite Aid had reported huge losses for years before finally engineering the change investors had long hoped for. Rite Aid's losses narrowed in fiscal 2012 to $368 million. While that's still a big loss, it represents a significant improvement in just the past few years. Rite Aid registered a $2.9 billion loss in fiscal 2009. Even better, it finally turned a profit in fiscal 2013. It's looking more and more like the company's turnaround is gaining momentum.

Walgreen, meanwhile, keeps humming along, providing the slow-and-steady performance that has enriched its shareholders over the past several decades. The company reported a 15% increase in both fourth-quarter and full-year fiscal 2013 adjusted earnings per diluted share. Quite simply, the company's results across the board were impressive. Walgreen generated record free cash flow of $3.1 billion in fiscal 2013, and as always, wasn't shy about sharing its success with its shareholders.

Walgreen is off to a great start to the current fiscal year as well, indicated by the fact that it reported a strong 8% rise in September sales. Progress across several metrics was notable: Walgreen generated a 10% increase in both prescriptions filled and pharmacy sales during the month. Moreover, comparable-store sales, which include only those locations open at least one year, were also impressive. Walgreen increased comparable-store sales by 7.4% in September.

A prescription for cash
Walgreen returned more than $1 billion to shareholders through dividends alone in fiscal 2013. Walgreen has a well-established trend of rewarding shareholders each and every year, which its long-term investors know very too well. Walgreen increased its dividend this year for the 38th year in a row. It's important for investors to understand that these haven't been token increases just to keep the streak going. Walgreen bumped up its payout by 15% this year and by 22% last year. All told, Walgreen's dividend has grown by a 23% clip over the past five years, compounded annually.

CVS also has an impressive dividend history. Earlier this year, CVS increased its distribution for the 10th year in a row. While CVS doesn't have a track record for increasing dividends that can compete with Walgreen, it's important to note that CVS is bumping up its payout at huge rates. The company boosted its dividend this year by 38%. With that kind of dividend growth, it won't take long to catch up to Walgreen's payout.

Rite Aid doesn't pay a dividend, which shouldn't be a surprise to anyone. The company needs to reinvest every penny it can into its business to expand and improve existing locations to better compete with the industry giants, Walgreen and CVS. As a result, Rite Aid investors won't have the downside protection of strong dividend payments. Therefore, only die-hard growth investors should prefer Rite Aid. Investors who highly value dividends should give preference to Walgreen or CVS.

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