After posting its highest quarterly net income ever, drug retailer Walgreen (NYSE: WAG) is now focusing on enhancing shareholder value through stock buybacks and a dividend boost.
In July the company simultaneously announced plans to buy back $2 billion worth of its shares and boost its quarterly dividend by 28.6%. This comes after its split up with pharmacy benefits manager Express Scripts (Nasdaq: ESRX). The news caused much consternation given that Express contributed about $5.3 billion in revenues to Walgreen.
The buyback
The current $2 billion repurchase program is its third repurchase plan since 2009 and comes after the Illinois-based drug retailer completed an earlier $1 billion share buyback announced in October last year. Walgreen has already bought back $3 billion worth of shares since 2009. Clearly, this company sees value in its stock.
Where's the money?
To determine if Walgreen's share repurchase makes sense, let's evaluate the fundamentals. Walgreen's LTM free cash flow stands at $2.87 billion, up from $2.25 billion a year ago. For a company with a market cap of $29.73 billion, that's pretty darn impressive. LTM operating cash flow, too, has jumped to $4.20 billion from $3.60 billion a year ago.
The company carries $2.4 billion in long-term debt. Its current ratio stands at 1.5 times, implying it really faces no obstacles in squaring off its short-term liabilities. Furthermore, with an interest coverage ratio of 55.4 times, it has no problem in paying interest obligations related to the $2.4 billion in long-term debt. Walgreen does more than just servicing debt, though; the company is a cash-generating machine and thus should have no issues with funding the buyback.
Value and yield
Let us now take a look at how the company is valued when compared to its industry peers.
|
Company |
Trailing P/E |
Forward P/E |
TEV/FCF |
|---|---|---|---|
| Walgreen | 11.1 | 10.1 | 13.6 |
| CVS Caremark (NYSE: CVS) | 13.3 | 10.3 | 12.4 |
| Kroger (NYSE: KR) | 11.45 | 10.18 | 14.9 |
Source: Capital IQ, a division of Standard & Poor's.
The company has been performing well in general and has a strong balance sheet. Compared to its peers, Walgreen appears to be quite reasonably priced, especially on a cash basis.
Moreover, this buyback should come as good news to investors as it shows the management's faith in the company's growth potential going forward.
The Foolish bottom line
Walgreen has been performing strongly of late and perhaps that's what makes management feel that the best use of its excess money is to return it back to shareholders and reinvest in themselves. The buyback is a great strategy and indicates management envisions a bright future ahead for Walgreen. Investors should take note.
