Walgreens Boots Alliance (WBA 1.56%) is a healthcare, pharmacy, and retail company that has been in business for 170 years.
You may think you know this company because of its more than 13,000 drug stores in nine countries, including more than 8,900 in the United States and U.S. territories. However, its brick-and-mortar retail locations are just part of its business, which also includes growing interests in full-service health clinics and specialty pharmacy management systems.
The company's stock is down more than 17% this year. There are logical reasons for that -- investors are concerned inflation will cut into the company's retail sales and that with fewer people traveling to its stores for COVID-19 vaccinations, sales will decline.
However, looking at the company's financials, I think Walgreens' value will hold during economic downturns, because healthcare spending is largely recession-proof and its business goes beyond the doors of its retail stores.
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A strong dividend that's well-protected
Walgreens raised its dividend by 2.1% last year to $0.4775 per quarterly share. It was the 46th consecutive year the company has increased its dividend, making it long ago a Dividend Aristocrat. At its current price, the yield on the dividend is 4.53%, well above the average S&P 500 company's dividend of 1.37%. Over the past 10 years, Walgreens has increased its dividend by 74%.
That dividend is well-covered with an annual cash dividend payout ratio of 38%. It's also safe because the company has slowly but steadily grown. Over the past 10 years, it has increased revenue by 85% and cash from operations by 25%.
Through the first six months of its 2022 fiscal year, Walgreens reported revenue of $67.7 billion, up 5% year over year, led by strong retail sales that jumped 12.4% in the first half of the year compared to last year. Earnings per share (EPS) over that time was $5.16, up from $0.83 in the same period last year. The company said it expects low single-digit growth in EPS for the rest of the year.
Where the growth is coming from
As a mature healthcare company, Walgreens isn't known for its growth, but there is potential there because of its newest efforts. The company has three segments: United States; International, which includes 4,031 stores overseas; and Walgreens Health. The last one was just created this past fall, so it is an area investors may be overlooking, and it is where the company can see growth.
Walgreens Health consists of the company's majority interests in three healthcare businesses. Most prominent is VillageMD, a full-service medical clinic that is co-located at 102 Walgreens stores with plans for 200 by the end of the year. The segment also includes the company's majority interest in CareCentrix, which provides post-acute and home care and already manages care for more than 19 million members through over 7,400 provider locations. The last key element is the company's majority position in Shields Health Solutions, a specialty pharmacy business.
Walgreens says it saw 128% year-over-year pro forma sales growth in the first half of the year from the Walgreens Health segment, including 145% growth from Shields. Overall, Walgreens said it has a goal of $2.2 billion in revenue from the segment this year.
Just being prudent
Walgreens has made several moves to increase profitability. Earlier this month, it sold 6 million shares of AmerisourceBergen for roughly $900 million. The company's ownership stake in the wholesale drug distributor declined from 28.1% to 25.2% with the move. Walgreens said the money will be used mostly to pay down debt and support its strategic priorities.
The pandemic, while it initially dealt a blow to in-store business for Walgreens, forced the company to make adjustments that will help it in the long run. When customers were wary of going to the store, Walgreens stepped up its e-commerce and omnichannel efforts with things like curbside and in-store pickup, same-day delivery, and new features in its phone app and website. In the the midst of the pandemic, it also revamped its loyalty program, myWalgreens. All those efforts should help the company going forward.
The company also launched a Transformational Cost Management Program to improve profit margins and said in its second-quarter report that the program is on track to save the company $3.3 billion annually by fiscal 2024.
Take advantage of a good opportunity
Walgreens' price drop has made the stock a great deal, in my opinion, with a price-to-earnings (P/E) ratio of less than six, more than 28% less than the average P/E of an S&P 500 company. That's a better deal than for competitors CVS Health, with a P/E of 16, or Rite-Aid, which actually lost $389 million in its last reporting period. A solid company with a relatively high-yielding dividend is likely to be one of the first companies to bounce back from the current market downturn. People are looking for safety, and Walgreens provides that plus a solid dividend to reward long-term investors.
