Both CVS Health (CVS 1.15%) and Walgreens Boots Alliance (WBA -0.23%) delivered disappointing returns in 2022. Neither stock has started off the new year with a bang, either.
However, Wall Street analysts think that both CVS and Walgreens should be winners over the next 12 months. Which is the better stock to buy in 2023? Here's how CVS Health and Walgreens stack up against each other in several key areas.
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Business models
CVS Health and Walgreens Boots Alliance are best known for their retail-pharmacy businesses. CVS ranks as the biggest pharmacy chain, with Walgreens coming in second.
However, both companies also operate in markets outside of retail pharmacy. CVS Health runs CVS Caremark, the leading pharmacy-benefits manager, based on market share. It owns Aetna, one of the biggest health insurers in the U.S. CVS Health also currently owns Omnicare, the top pharmacy for long-term care, but plans to sell the unit.
Walgreens Boots Alliance operates a pharmaceutical wholesaling and distribution business in Germany and has an optical-care franchise in the U.K. The company has also expanded into new markets via acquisitions. For example, the purchase of VillageMD enabled Walgreens to enter the value-based primary-care services market, while the acquisition of CareCentrix put the company in the post-acute and home-care management business.
Growth prospects
Analysts estimate that CVS Health increased its revenue by 7.8% in 2022. Earnings growth will likely be lower. However, CVS expects to gain momentum in 2023. It's targeting high-single-digit earnings growth.
Walgreens' top and bottom lines, on the other hand, are going in the wrong direction. In the company's fiscal 2023 first quarter, revenue fell 1.5% year over year, with adjusted earnings per share down 30.8%. But the company expects modest sales growth for the full year. It also looks for adjusted earnings per share to increase between 8% and 10%.
Over the next five years, Wall Street is more bullish about CVS Health's growth prospects. The average analyst estimate is for CVS to deliver average annual earnings growth of 5.4%, compared to only 2.3% for Walgreens.
Valuations
Both of these healthcare stocks have attractive valuations, compared to the overall market. CVS Health's shares currently trade at close to 9.9 times expected earnings. Walgreens' forward earnings multiple is only 7.9.
Dividends
CVS Health offers a dividend yield that currently stands at nearly 2.8%. The company suspended dividend hikes for several years in connection with its acquisition of Aetna. However, CVS has increased its dividend by 21% over the past two years.
Walgreens belongs to the elite group of stocks known as Dividend Kings and has increased its dividend for 47 consecutive years. Its yield currently tops 5.3%.
Better pick?
Sometimes, the best answer to a question is... it depends. I think that's the right answer when deciding between CVS Health and Walgreens Boots Alliance.
If you're primarily looking for income, Walgreens appears to be the better choice. Some might wonder if the company's dividend is safe, considering that its free cash flow is declining. However, Walgreens will almost certainly do everything possible to keep its impressive streak of dividend hikes going.
For investors whose primary focus isn't income, though, CVS Health earns the nod. CVS Health's business is in better shape overall than Walgreens' business. The company's scope of operations enables it to focus on improving healthcare outcomes and controlling healthcare costs more effectively than most of its peers.
I think that CVS Health should be able to deliver low-double-digit percentage earnings growth over the long term. I'm not sure if Walgreens is in a position at this point to match that.
