Being one of the 30 stocks included in the Dow Jones Industrial Average is an honor conferred upon only the most notable and impactful companies. The list changes over time, and news stocks are added for various reasons. Companies like Disney (DIS 0.18%) and Walgreens Boots Alliance (WBA -1.33%) make the list, in part, because both are clearly household names.
The problem for these two stocks (and by association the Dow) is these two stocks have been out of favor of late. Long-term investors need to see the potential of such a situation.
1. Walgreens: Change is hard
Walgreens is one of the largest pharmacies in the world, with around 13,000 locations across the United States, Europe, and South America. It has a long and successful history behind it, highlighted by its dividend, which has been increased annually for 48 consecutive years. That puts the company on the cusp of achieving the highly elite Dividend King status. You don't increase a dividend annually for decades on end without doing something right. The dividend yield today is a historically attractive 5.4%.
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That said, Walgreens is facing some short-term issues, like lapping outsized profits related to the COVID-19 pandemic and transition expenses. The big one-time cost that pushed fiscal 2023 second-quarter (ended Feb. 28) results lower was an opioid settlement expense, but with that in the rearview mirror, the company shouldn't have to worry about this issue as much in the future. The demand boost from COVID-19 testing and vaccines is merely a bump in the road, and once that's fully lapped comparisons will be easier in the future. Simply put, there is a lot of noise right now in Walgreens' earnings.
The most important issue, however, is the company's ongoing investment (via acquisition and internal spending) in shifting its business model. At this point, Walgreens has built itself into one of the largest primary healthcare providers in the United States, further entrenching itself in the lives of its customers and the overall healthcare industry. This is expected to be a material long-term growth driver for the company, particularly as the aging of the baby boom generation is likely to lead to increased healthcare demand over the next couple of decades.
If that sounds like a business repositioning that has long-term appeal, then you'll want to look at Walgreens today, given that the price of this Dow stock is down more than 20% over the past year.
2. Disney: Already starting to come back
By comparison, Disney's stock is on the upswing so far in 2023, gaining 14%. But looking back 52 weeks, shares are still down around 15%. That suggests that there is still some opportunity here for long-term investors to take advantage of Wall Street's dour mood.
The big story is the return of Robert Iger as CEO. This came after a very difficult tenure for Iger's replacement (Iger retired in 2020). To be fair, the coronavirus pandemic was a big headwind for the last CEO to endure, but he lost the confidence of Wall Street and the board, so a change was appropriate. Iger, meanwhile, still faces a lot of challenges, most notably turning the streaming business profitable. In the fiscal first quarter of 2023, the streaming business was roughly $1.1 billion in the red.
But investors shouldn't overlook the company's many positives. For example, it owns an irreplaceable list of popular franchises, including the Disney princesses, Marvel, Pixar, and Star Wars, among many others. It is also a globally leading name in amusement parks. There's a huge amount of benefit from cross-pollination here that has, historically, led to robust financial results.
Given the company's storied history, it is highly likely it figures out how to survive in the changing media landscape. And, frankly, the situation looks much better than it did just a short while ago, with Iger refocusing the company's efforts on creativity. The dividend, which was suspended in 2020, is also expected to come back in early 2024. So things are starting to look up -- and while the shares are still underwater compared to a year ago, long-term investors might want to do a deep dive.
A temporary fall from grace
When iconic companies go through tough times they are often given the label "fallen angels." Every fallen angel doesn't regain its wings, but if you look at Walgreens and Disney, there are good reasons to believe they will fly again. It looks like Disney is already starting to take flight, so time could be of the essence there. Meanwhile, Walgreens is still building the foundation for a much different future in the pharmacy business. Either way, these Dow stocks look like they could see increasingly brighter days ahead.
