Is Walgreen Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Walgreen (NASDAQ: WBA  ) fit the bill? Let's look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Walgreen's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's look at Walgreen's key statistics:

WAG Total Return Price Chart

WAG Total Return Price data by YCharts

Passing Criteria

3-Year* Change


Revenue growth > 30%



Improving profit margin



Free cash flow growth > Net income growth

(6%) vs. 25.2%


Improving EPS



Stock growth (+ 15%) < EPS growth

75.6% vs. 26.5%


Source: YCharts.
*Period begins at end of Q4 (Nov.) 2010.

WAG Return on Equity (TTM) Chart

WAG Return on Equity (TTM) data by YCharts

Passing Criteria

3-Year* Change


Improving return on equity



Declining debt to equity



Dividend growth > 25%



Free cash flow payout ratio < 50%



Source: YCharts.
*Period begins at end of Q4  (Nov.) 2010.

How we got here and where we're going
We looked at Walgreen last year, and it has dropped one passing grade in its second assessment to finish with a modest four out of nine possible passing grades. Walgreen's free cash flow growth has collapsed over the last year, but it can still maintain healthy dividend payouts at current levels. More worrying is that Walgreen's stock growth has outpaced the gains in its net income, which demonstrates investor confidence but which might also indicate a looming correction if the company's fundamentals fail to rise. How might Walgreen push its fundamentals higher on the heels of Obamacare's rollout? Let's dig a little deeper to find out.

In the latest quarter, Walgreen's top and bottom lines improved by 6% and 66%, respectively, thanks to staggering growth in its prescription business, which now accounts for more than 64% of total sales. Fool contributor Travis Hoium points out that Walgreen is poised to capture a large amount of the prescription market due to rapid urbanization across the U.S. However, Walgreen's pharmacy segment may fall short of rival CVS Caremark's  (NYSE: CVS  ) highly integrated business model, which includes both pharmacy stores and pharmacy benefit management solutions, and which tends to provide superior negotiation and scale advantages over its industry peers.

Walgreen and CVS have been putting forth huge efforts to diversify their businesses away from the traditional retail pharmacy model. Fool contributor Anh Hoang notes that Walgreen has lucrative partnerships with Alliance Boots, the leading European integrated wholesale retailer, and AmerisourceBergen, a U.S. pharmaceutical service wholesaler, which could give it the heft to demand lower pricing from drug manufacturers. By contrast, CVS' faster adoption of margin-friendly health care services such as MinuteClinics, which are expected to number 10,500 locations by 2017, could deliver substantial service revenue growth in the next few years. Smaller peer Rite Aid (NYSE: RAD  ) continues to shut unprofitable locations, focus on cost control, and introduce more generic drugs, which could lure cost-conscious consumers from the market leaders. Fool contributor Todd Campbell notes that the generic drugs market could gain significant traction as a number of high-profile patents expire. CVS is already pushing hard in this direction, as it recently entered into a partnership with Cardinal Health (NYSE: CAH  ) , creating the U.S. largest generic sourcing entity.

CVS, Walgreen and Rite Aid are all trading at similar forward P/E levels (14.5, 15.7 and 14.9, respectively), but Walgreen sports the highest dividend yield of the trio, making it the first choice for yield-hungry investors:

WAG Dividend Yield (TTM) Chart

WAG Dividend Yield (TTM) data by YCharts

Recent changes to the insurance market as a result of Obamacare have caused a boom in the number of in-store health care clinics in the U.S. Walgreen's Take Care clinics are now available at around 400 locations as compared to 350 in 2012, and are expected to rise at a faster rate in the coming years. Since the Affordable Care Act is expected to add 30 million people to insurance rolls, smaller grocery-focused players such as Kroger have also been looking to expand their health-care footprints and resources. Seniors, the formerly uninsured, and existing health care consumers should make greater use of retail health-care clinics for immunizations, chronic care, and cold and flu diagnosis and treatment. Fool contributor Lee Samaha notes that Walgreen has even teamed up with Theranos to launch lab testing service inside its stores.

Putting the pieces together
Today, Walgreen has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

Looking for other ways to profit from the Obamacare rollout?
Obamacare seems complex, but it doesn't have to be. In only minutes, you can learn the critical facts you need to know in a special free report called "Everything You Need to Know About Obamacare." This free guide contains the key information and money-making advice that every American must know. Please click here to access your free copy.

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2791950, ~/Articles/ArticleHandler.aspx, 8/29/2015 5:22:42 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Alex Planes

Alex Planes specializes in the deep analysis of tech, energy, and retail companies, with a particular focus on the ways new or proposed technologies can (and will) shape the future. He is also a dedicated student of financial and business history, often drawing on major events from the past to help readers better understand what's happening today and what might happen tomorrow.

Connect with Alex on LinkedIn or Twitter for more news and insight:

View Alex Planes's profile on LinkedIn

Today's Market

updated 20 hours ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:00 PM
WBA $87.42 Down -0.43 -0.49%
Walgreen Boots All… CAPS Rating: ****
CAH $83.39 Down -0.30 -0.36%
Cardinal Health, I… CAPS Rating: *****
CVS $104.18 Down -1.02 -0.97%
CVS Health CAPS Rating: ****
RAD $8.24 Down +0.00 +0.00%
Rite Aid Corp CAPS Rating: ***