3 Pharmacy Businesses Keep Delivering Good Value to Investors

Walgreen (NYSE: WAG  ) has had a good 2013 as its share price has risen nearly 55.20% since the beginning of the year. CVS Caremark (NYSE: CVS  ) also enjoyed a nice run on the market with a 48% gain, while Express Scripts (NASDAQ: ESRX  )  saw its shares increase by more than 30.70% year-to-date. The market optimism for Walgreen has been fueled by significant bottom-line growth, driven by the company's new partnerships. So is Walgreen a good buy compared to CVS and Express Scripts? Let's find out.

Two long-term partnerships fueled Walgreen's performance
In the first quarter of fiscal 2014, Walgreen's total sales reached $18.3 billion, 5.9% higher than its sales of $17.3 billion in the same period last year. The company filled 213 million prescriptions in the first quarter and its pharmacy market share increased by 50 basis points to 19.4%. Walgreen's operating income grew by 31.1% from $705 million to $924 million.

What might excite investors is Walgreen's 66% earnings-per-share growth, as EPS rose from $0.43 last year to $0.72 this year. This EPS growth was due to Walgreen's partnership with Alliance Boots, the joint venture with generics manufacturers, and the integration of AmerisourceBergen into its global procurement process. Walgreen's partnership with Alliance Boots added around $0.14 per adjusted diluted share to the company's first-quarter EPS.

The company is quite confident about its strategic partnership with Alliance Boots and its long-term relationship with AmerisourceBergen. The former is the leading European integrated wholesale retailer, and the latter is the famous U.S. pharmaceutical service wholesaler. Thus, with the huge scale of both Alliance Boots and AmerisourceBergen, Walgreen's deep relationships with these two iconic brands could allow the company to demand lower price from drug manufacturers.  By 2016, Walgreen expects to achieve four main goals: $130 billion of sales from Alliance Boots and other joint venture operations, $1 billion in synergies, operating cash flow of $8 billion, and net debt of $11 billion. 

CVS Caremark and Express Scripts are also good choices for investors
CVS Caremark, on the other hand, can be expected to enhance shareholder value by generating a lot of free cash flow, around $39 billion in the five-year horizon from 2014-2018, driven by its solid earnings growth and improvement in working capital. CVS has exceeded its original growth estimate for its retail busienss by around 200-400 basis points, party due to patient retention which resulted from the dispute between Walgreen and Express Scripts.

The company is also committed to return cash to shareholders via both dividend payments and share repurchases. Dating back to 2010, CVS has maintained a low payout ratio at only 14%. Over time, CVS targets 25% annual growth in its payout ratio, which could reach 25%-30% by 2015. In addition, it expects to buy back around $3-$4 billion worth of shares annually. 

At the current trading price, CVS yields 1.50%, less than Walgreen's dividend yield at 2.20%. However, CVS spends most of its cash to buy back shares rather than paying dividends. The company has also announced a new $6 billion share repurchase program that gives investors a juicy 7.10% share buyback yield.

Express Scripts is the biggest pharmacy-benefit manager in the U.S., with a big market share in the Medicare prescription market. The company is also a good cash flow generator which returns cash to its shareholders, not via dividend payments but via share buybacks. In the third quarter, Express Scripts generated around $1 billion in operating cash flow, of which $751.5 million was deployed to buy back 11.6 million shares. Thus, year-to-date Express Scripts has repurchased 24.9 million shares to return as much as $1.6 billion to shareholders for a 2.8% buyback yield. 

My Foolish take
Looking forward, the long-term partnerships with Alliance Boots and AmerisourceBergen could continue to drive growth for Walgreen. A lot of value will be delivered to investors by 2016, when Walgreen will generate $130 billion in revenue and $8 billion in operating cash flow. Investors could also benefit from holding CVS and Express Scripts for the long run. With decent cash return yields via their share repurchases and dividends, CVS and Express Scripts could also fit well in investors' income portfolios. 

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