3 Drugstores for Your Portfolio: CVS, Walgreen, and Rite Aid

Depending on what the patient needs, CVS, Walgreen and Rite Aid can deliver the right medicine for your portfolio.

Jan 3, 2014 at 7:58PM

Drugstores can be an interesting sector for investors looking to position their portfolios in defensive companies supported by strong secular tailwinds due to rising health-care demand in the long term. With their owns weaknesses and strengths, companies like CVS (NYSE:CVS), Walgreen (NASDAQ:WBA), and Rite Aid (NYSE:RAD) have plenty to offer investors.

CVS is the quality play
CVS benefits from a high-quality, integrated business model. The company is not only one of the largest U.S. pharmacy retailers, but also a leading pharmacy benefit manager, or PBM. This vertical integration provides diversification and multiple growth venues for the company, and it also produces negotiation and scale advantages for CVS versus smaller players in the industry.

CVS has outgrown competitors like Walgreen and Rite Aid by a wide margin over the last 10 years, and the company has superior profit margins in the area of 6.4% at the operating level versus operating margins near 5.1% for Walgreen, and 3.9% for Rite Aid.

Captura De Pantalla

Source: YCharts

The company seems to be entering 2014 with strong financial momentum; on Dec. 18, management reaffirmed guidance for an increase of between 10.25% and 13.75% in earnings per share during the coming year. In addition to this, CVS rewarded investors with a big increase of 22% in dividends per share.

Executive Vice President and Chief Financial Officer Dave Denton sounded quite optimistic in the press release:

CVS Caremark has a strong track record of meeting or exceeding our financial targets. The outlook for 2014 is bright, and we are focused on strategies that will lead to solid, long-term enterprise growth.

Healthy dividends from Walgreen
Dividends may be one of the biggest advantages Walgreen has over the other companies in the industry. The company has a rock-solid track record of dividend increases, as it has paid a dividend in 324 straight quarters -- more than 80 years -- and has raised its dividend for 38 consecutive years, including a 14.5% dividend hike for 2013. During the last five years, the company has increased dividends from $0.45 per share to $1.26 per share, resulting in a compound annual growth rate of nearly 23%.

The three companies trade at similar valuation ratios when looking at forward P/E levels: Walgreen has a forward P/E of 14.5 versus 15.7 for CVS, and 14.9 for Rite Aid. When it comes to dividend yield, on the other hand, Walgreen is clearly the most attractive one in the group with a yield of 2.2% in comparison to 1.2% for CVS, and no dividends for Rite Aid.

Walgreen reported better-than-expected earnings on Dec. 20; adjusted earnings per diluted share jumped by a remarkable 24.1% year over year to $0.72 per share on the back of a 2.4% annual increase in front-end comparable-store sales, and a rise of 5.9% in total revenue during the quarter.

President and CEO Greg Wasson has a moderately positive vision about the company´s financial performance during the quarter: "Given the continued soft economy, we were generally satisfied with our top-line growth where we increased both traffic and sales for the quarter as well as our pharmacy market share."

Small size and big potential with Rite Aid
With a market cap below $4.5 billion versus $53.5 billion for Walgreen, and nearly $85 billion for CVS, Rite Aid is by far the smallest company in the group. This has some disadvantages in terms of scale and financial resources, but it also means higher growth potential for Rite Aid when compared to bigger industry players.

The company is implementing a remarkable turnaround during recent quarters by closing unprofitable locations, focusing on cost control, and introducing more generic drugs to boost sales and increase profitability. This is an added source of uncertainty and volatility for investors in Rite Aid, but it also provides further upside potential if management continues leading the company in the right direction.

The stock crashed by more than 10% when Rite Aid reported earnings on Dec. 19 -- many investors seem to have felt disappointed by management´s conservative guidance. However, Rite Aid recovered a considerable portion of that decline, jumping by more than 8.5% on Friday as the company announced a healthy increase of 2.9% in same-store sales during December.

All in all, even if a turnaround is always a risky situation, the company seems to be on the right track in terms of sales and financial performance during the last several quarters.

Bottom line
CVS offers superior quality and has shown better financial performance during the last few years, while Walgreen is the dividend play in the sector due to its higher yield and rock-solid track record of dividend growth. For those with a higher risk tolerance and looking for more upside potential, Rite Aid may be the way to go. Whatever the doctor orders, these drugstores can deliver.

More dividend stock ideas
Dividend stocks can make you rich. It's as simple as that. While they don't garner the notoriety of high-flying growth stocks, they're also less likely to crash and burn. And over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.

Fool contributor Andrés Cardenal has no position in any stocks mentioned. 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 may not 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers