Walgreens Boots Alliance (WBA -1.18%) and CVS Health (CVS -0.65%) are the two biggest retail pharmacy chains in the U.S., but they haven't behaved similarly as investments over the past decade. Though both stocks underperformed the market's gain of 222%, CVS still returned 154%, soundly beating Walgreens' advance of just 28%.
But will that same dynamic play out again in the future, and is one likely to be a better growth stock as a result? Let's examine what's going on with each company to find out.
CVS looks to capture the market for primary care
The biggest piece of CVS' growth story is its aim of expanding its pharmacy empire by providing primary care services at its more than 1,100 in-store clinics. CVS is now also competing in medical insurance markets via its Aetna subsidiary. That means the company has a position in every link of the healthcare chain, from establishing coverage to making a diagnosis and providing treatment and followup services to patients.
This push into primary care and insurance are likely to keep driving the company's growth. But that growth is unlikely to be very fast-paced, even with a slew of recent acquisitions in play. In the second quarter, its healthcare benefits segment grew revenue by 10.9% year over year to $22.7 billion, slower than the 11.7% rise in revenue from the pharmacy services segment, which brought in $42.8 billion.
That means despite its significantly smaller size as a portion of the revenue mix and considerable strategic investment, healthcare benefits aren't ramping up their sales any faster than CVS' bread-and-butter pharmacy business. Plus, it's hard to make much of a dent in a top line that totaled $292.1 billion in 2021. So overall, CVS isn't exactly a stock that's likely to go to the moon anytime soon.
Walgreens' clinics expand as other segments falter
Walgreens is pursuing a similar strategy to CVS by beginning to provide healthcare and coverage at its retail pharmacy locations. But its financial performance is less impressive, and there aren't any obvious changes in progress that would make things go differently moving forward.
Its new healthcare segment grew by 75% in its 2022 fiscal year, generating revenue of $1.8 billion but badly missing management's expectations, which were for up to $3.2 billion in sales. Due to declining revenue in its core retail pharmacy segment, the top line actually shrunk on a constant-currency basis, falling by 3.2% year over year in its fiscal fourth quarter.
That's not great news for the company's prospects of being a growth stock at all, never mind a better one than the still-growing CVS. What's more, management is forecasting that its 2023 fiscal year will see Walgreens' top and bottom lines struggle to hold their ground due to lingering disruption from COVID-19. Therefore, in the near term it's improbable that it'll have a chance of outgrowing CVS.
Expect more of the same
In the long-term, there still isn't much reason to believe that Walgreens will be able to expand any faster than its larger competitor. It's more indebted, and its free cash flow (FCF) has fallen over the last 10 years while CVS' rose sharply. Those two things mean Walgreens will likely find it more expensive to raise new capital to finance large initiatives at a time when its ability to self-finance is weakening. And that's before even considering its lack of growth over the last year or its slow rate of dividend expansion, which over the last three years was only 4.9% compared to CVS' rise of 10%.
So, while CVS isn't a monster stock in the making, it'll be a better bet than Walgreens if you're looking for growth. But if you want real growth, it's probably best to look elsewhere, as neither of these two businesses is going to beat the market anytime soon.
