Walgreen Company: Should Investors Love This Dividend Aristocrat?

Or would you be better off with one of its competitors?

Apr 22, 2014 at 6:30PM

We might not have a royal family in the US, but steady income seeking investors are well acquainted with dividend aristocrats like Walgreen (NASDAQ:WBA). Members of this elite class have steadily increased shareholder distributions during each of the last 25 years.

After more than a century of operations Walgreen continues to reach new heights. When it last reported earnings, quarterly revenue broke a company record of $19.6 billion as comparable store sales rose 4.3%.

Upwardly mobile
While growth at Walgreen has been respectable, its top line is dwarfed by CVS Caremark's (NYSE:CVS). As both the second largest pharmacy benefit manager and retail pharmacy store operator in the U.S., its fourth quarter 2013 revenues reached $32.8 billion.

Walgreen is still No. 1 when it comes to U.S. retail pharmacy sales, but just barely. CVS Caremark's retail pharmacy segment reached $17.2 billion in 2014's fourth quarter as same store sales grew 4%. The company should release first quarter earnings early next month, but until then its retail pharmacy segment appears to be a few steps behind Walgreen's.

A distant third
In terms of retail pharmacy sales Walgreen and CVS Caremark are miles ahead of their nearest competitor, Rite Aid (NYSE:RAD). Investors that prefer underdogs are enamoured with the company's recent turnaround. After years of losses it's been furiously shuttering, remodeling, and rebranding stores. So far the plan is working.

Earlier this month Rite Aid reported quarterly revenue of $6.6 billion. The company closed 37 stores throughout the year, ending fiscal 2014 with 4,587 -- a U.S. footprint roughly half of Walgreen's. Despite the reduction in locations, the top line was about $100 million higher year-over-year. The gain was driven by a same-store sales increase of 2.1%.

Payout power
Rite Aid's return to positive earnings is impressive, but the company hasn't paid a dividend since 1999. By contrast, CVS Caremark may soon deserve a seat at the dividend aristocrat table along with Walgreen. Since 2003 both companies have steadily increased their dividends at a compound annual growth rate over 20%.

WAG Payout Ratio (TTM) Chart

WAG Payout Ratio (TTM) data by YCharts

Both companies have increased dividends by a similar rate over the past 11 years, but CVS has done so without breaking a sweat. The company has stayed a step ahead of Walgreen, while distributing less than 24% of net income to shareholders.

Spreading out
Walgreen's U.S. retail operations may be just a few steps ahead of CVS Caremark's, but it's hardly in danger of losing its top spot on the worldwide retail pharmacy leaderboard. Over the past few years Walgreen has stacked the deck with some shrewd maneuvers, dealing itself a royal flush in the process.

Following a seven-month fight with Express Scripts that forced millions of customers to fill prescriptions elsewhere, Walgreen began reducing its exposure to the U.S. market. The company's 45% stake in Alliance Boots effectively makes it the world's single largest purchaser of generics. A joint venture with China's Guangzhou Pharmaceuticals could help it retain that title for years to come.

Bigger customers usually get bigger discounts. Just over a year ago Walgreen entered another partnership to consolidate its drug purchases through a single channel. Pharmaceutical distributor AmerisourceBergen is now responsible for all of Walgreen's branded drug purchases, and will soon handle all of its generics.

While Walgreen has been aggressively expanding abroad, CVS keeps control of its exposure to the U.S. retail market through the integration of a second business channel. As a pharmacy benefit manager it now serves more than 60 million plan members. Operating profit from the company's pharmacy services segment rose about 15% last year, comprising roughly 38% of the 2013 consolidated total.

Final take
CVS Caremark's consolidation of retail pharmacy, benefit management, and health clinic is a smart move for retaining customers in an increasingly austere environment, with CVS pharmacies increasingly serving as a one-stop shop for customers. The upward trend of its top and bottom lines over the past couple years suggest it's working. I'll be surprised if CVS doesn't earn a seat at the dividend aristocrat table in about 14 more years.

Walgreen's bold expansion into international markets presents an excellent opportunity for long-term growth. Unfortunately the strategy also includes a great deal of execution risk. Until this dividend aristocrat's international expansion plays out further, investors might sleep easier with CVS Caremark in their portfolios and Walgreen on their watchlist.

More top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.


Cory Renauer has no position in any stocks mentioned. The Motley Fool recommends CVS Caremark and 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.

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