3 Pharmacy Businesses Keep Delivering Good Value to Investors

Walgreen, with its two long-term partnerships, can deliver good value to its shareholders. CVS and Express Scripts also benefit investors with their dividends and share buybacks.

Jan 3, 2014 at 2:42PM

Walgreen (NASDAQ:WBA) 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. 

Want to retire rich?
It's no secret that investors tend to be impatient with the market, but the best investment strategy is to buy shares in solid businesses and keep them for the long term. In the special free report, "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.

Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Express Scripts. The Motley Fool owns shares of Express Scripts. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

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.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

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. The show is also heard weekly on dozens of 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. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers