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Walgreen Investor Pressure Is Absurd

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Big U.S. corporations shuffling their businesses around the world for tax advantages is nothing new or uncommon. With one of the chunkiest corporate tax rates in the Western world, the United States is a pricey place to call home. For a long-held U.S. company to up and leave completely, though, is a different story. Pharmacy giant Walgreen (NASDAQ: WBA  ) is under pressure to do just that, according to the Financial Times. The move, which is called a tax inversion, would shift more than 20% of shares to foreign owners and avoid U.S. domestic tax status. Management seems hesitant -- and for a good reason.

Not PC
To understate the obvious, moving the $61 billion pharmacy giant outside of the United States for little reason other than to avoid a tax bill would be a political no-no. For one thing, Walgreen earned nearly $2.5 billion in net income during its last reported fiscal year. Last quarter alone, it generated $1.1 billion in cash from operations from its 8,200 core stores. In two years, the stock is up roughly 100%.

There is no way to make the case that Walgreen is hurting.

Yet a group of shareholders representing roughly 5% of the company, including Goldman Sachs and various hedge funds, are reportedly "frustrated" that Walgreen management refused to even consider moving their domicile to Europe. The reason is simple: Earnings per share could increase 75% if the company switched up its tax base. According to a recent investor conference call, the company's U.S. business has an effective rate of 37.5%, while its stake in Alliance Boots (Europe's biggest pharmacy chain) is taxed at 20%.

Can this really be considered ignoring the best interests of shareholders? The backlash here in the U.S. from regulators, not to mention the public, would be tremendous. One of the most successful retailers around would avoid paying taxes while not losing one iota of influence or sales in its core U.S. market.

As investors grow their influence on public businesses and the rise of activist investing becomes a daily battle, the focus of many good companies could easily shift further away from their fundamental purpose. Walgreen has the wind at its back with great prospects in the back-of-store pharmacy and slow-but-steady sales in the front. Of all of the brick-and-mortar retailers out there, Walgreen and its peers are in the top echelon of businesses to own.

This is one instance where investor influence is pushing the company away from progress, and keeping management occupied with factors that will not aid the operating business in the long run.

Cheers to Walgreen CEO Greg Wasson for his "refusal" to consider moving the business overseas -- let's hope the resilience stands.

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Read/Post Comments (2) | Recommend This Article (4)

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  • Report this Comment On April 16, 2014, at 2:04 PM, wstr wrote:

    Articles like this are why I come to Motley Fool - nice to see market writing with an actual soul!

  • Report this Comment On April 16, 2014, at 4:18 PM, RetiredInvesta wrote:

    You sure got this one wrong Michael. Walgreens would be betraying it's shareholders by 'not even considering' the move overseas. I believe that if Walgreens' management were to consider this option, they would find that moving overseas is a BAD idea - and this drama would be over and done. I am already moving out of WAG stock because this episode indicates a serious flaw in Walgreens' management. Any management team that will not even consider change is betraying it's shareholders. Shareholders need a solid management to navigate, and closing an eye to an opportunity is unforgivable.

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Michael Lewis

Michael is a value-oriented investment analyst with a specific interest in retail and media businesses. Before coming to the Fool, Michael worked with private investment funds focusing on deep value and special situations. Currently living in the media capital of the world--Los Angeles, California.

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