CVS Health (CVS -1.03%) and Walgreens Boots Alliance (WBA -0.38%) have a lot in common. They both have recognizable pharmacy retail businesses that millions of consumers across the country know well. And they've also been pursuing growth opportunities to expand their top and bottom lines.
But which one has the better approach, and which is the better buy today? Is it the acquisition-hungry CVS Health, or Walgreens and its mission to have up to 1,000 primary care clinics at its stores?
The case for CVS Health
CVS Health is becoming one of the top, most diversified healthcare companies in the world. It has been busy wheeling and dealing over the years to get much bigger. In 2018, it closed a mammoth $69 billion acquisition of health insurer Aetna. Just last month, CVS also closed on its acquisition of home health company Signify Health for $8 billion. It has also announced plans to acquire primary care operator Oak Street Health for $10.6 billion.
The company has been using its considerable resources to become more diversified -- and by doing so, it may become more resilient to economic headwinds. Healthcare is a relatively safe industry to be in as it is a necessity that people generally can't do without. And over the past five years, CVS' operations have grown significantly in terms of both sales and free cash flow.
CVS Revenue (Annual) data by YCharts
Growing free cash flow is important for a couple of reasons. The first is that it allows a business to spend cash and invest in its own operations or to pursue acquisitions, as CVS has done. The second is that it can also make its dividend safer. Last year, CVS' free cash flow was $13.5 billion -- more than four times the $2.9 billion it paid out in dividends.
That gives the company a huge buffer to be able to balance both dividends and pursuing growth. And at 3.2%, the yield CVS offers is well above the S&P 500 average of 1.7%. For growth and dividend investors, CVS can be an exciting stock to own for both its potential upside as well as steady stream of dividend income.
The case for Walgreens Boots Alliance
Walgreens hasn't been nearly as aggressive when it comes to acquisitions as CVS has been. But that doesn't mean it hasn't been pursuing growth initiatives.
Walgreens' efforts have been more focused on primary care. In 2021, it announced a $5.2 billion investment into primary care company VillageMD, with the goal of launching 1,000 clinics at its locations by 2027. It invested another $3.5 billion last year to help fund VillageMD's acquisition of Summit Health-CityMD, which provides specialty and urgent care.
As a result of that acquisition, Walgreens projects that its new healthcare business will generate up to $16 billion in revenue by fiscal 2025 (ending in August). That would represent a significant piece of its operations as Walgreens generated around $133 billion in sales for its most recent fiscal year.
Assuming its core business remains stable, the new healthcare business could boost the top line by 12%. By giving consumers even more of a reason to shop at its drugstores, knowing that a clinic is also nearby, Walgreens may generate better sales numbers.
Investors are better off going with CVS
CVS is the stock that growth investors are better off going with today. While Walgreens' strategy to focus on healthcare and having clinics near its stores is sound, my concern is that it could run into cash flow issues. Its free cash flow in its latest fiscal year was less than $2.2 billion -- not a whole lot of coverage for its dividend payments, which totaled nearly $1.7 billion.
Given its aggressive plan for 1,000 clinics, there's simply not enough of a buffer there where I'd feel confident in its ability to succeed without potentially slashing its dividend, which today yields 5.4% and is likely a key reason many investors buy the stock.
Walgreens doesn't have a great track record when it comes to growth, and with a less diversified business than CVS, there's more risk here as well. Although Walgreens looks like an incredibly cheap buy, CVS is more likely to succeed with its growth strategy and is a better investment option today.
