What happened
Shares of Walgreens Boots Alliance (WBA 0.60%) rose 16.4% last month as investors favored healthcare stocks and other defensive industries. There wasn't any major news about Walgreens in December. It's announcing quarterly earnings in the first week of January, so whispers could have contributed to the returns. Still, Walgreens' stock price chart is nearly identical to those of CVS Health (CVS -0.27%) and the Health Care SPDR (XLV 1.10%) exchange-traded fund, which suggests a trend that's common across all healthcare stocks.
WBA, CVS, and XLV total return level. Data by YCharts.
So what
It's sort of the perfect storm for Walgreens. There are two major threats to the stock market right now: surging COVID-19 cases and volatility driven by Fed tapering of bond buying. Tapering and interest rate hikes are driving investors back toward value stocks, while many healthcare stocks get a boost from widespread health concerns. Walgreens is a relatively stable and noncyclical business, it pays a consistent dividend, and its stock is fairly cheap.
Image source: Getty Images.
Walgreens' forward price-to-earnings ratio is only 11 right now, and its enterprise-value-to-EBITDA is under 9. Both valuation ratios are well below the levels we've seen from this stock over the past decade. Even at a moment where valuations are historically high across the market, Walgreens remains a relative bargain.
The pharmacy chain also pays a nice 3.5% dividend yield. It's a Dividend Aristocrat that's increased its payout annually for 45 consecutive years.
WBA dividends paid (TTM). Data by YCharts. TTM = trailing 12 months.
These are the sort of stocks that became desirable in December. There was marketwide fuel behind Walgreens and its healthcare sector peers.
Now what
Walgreens stock is still pretty cheap, and it's paying one of the higher dividend yields you'll see from low-risk stocks. Shareholders could enjoy price appreciation from valuation inflation. That's especially true as Fed tapering encourages capital to flow from growth stocks to value stocks.
Walgreens is less exciting on the basis of fundamentals. It's a stable company that produced around $4 billion in free cash flow over the past 12 months. Reliable cash flows are great, but there's not much growth in this story. Walgreens' revenue has been mostly stagnant for years, and that's not expected to change in the foreseeable future. At an 82% dividend payout ratio, there's no reason to expect shareholder distributions to increase much in the next few years.
Walgreens has numerous powerful short-term catalysts, and there's no reason to expect those to go away soon. Things aren't so clear over the long term.
