Which Will Deliver the Most Value: Rite Aid, Walgreen, or CVS?

Rite Aid (NYSE:RAD) has made its shareholders extremely happy; its share price has jumped significantly since the beginning of the year, from around $1.30 per share to nearly $6 per share. However, no trees could grow to the sky. Rite Aid recently took a hit, dropping down to nearly $5 per share in just half a month.

While Rite Aid is considered a good turnaround story, its bigger peers CVS Caremark (NYSE:CVS) and Walgreen (NASDAQ:WBA) are seen as having better-established businesses with more stable operating performances. Let's take a closer look at Rite Aid to see whether or not it is a good buy compared to the competition.

Declining EPS due to preferred stock redemption
In the third quarter of fiscal 2014, Rite Aid reported modest year-over-year revenue growth, from $6.2 billion last year to nearly $6.4 billion this year, while net income jumped by more than 15.6% and surpassed $71.5 million. However, diluted earnings per share experienced a significant decline, from $0.07 per share last year to only $0.04 per share this year due to the redemption of series G and H preferred stock and a higher share count. Its same-store sales delivered decent growth of 2.3%, including 3.5% growth in pharmacy sales and a 0.2% decrease in front-end sales.

Rite Aid and Walgreen are cautious while CVS raised its estimates
What made investors pessimistic was the company's cut in the full-year estimate. Rite Aid cut its profit forecast significantly, from $0.18 to $0.27 per share to only $0.17 to $0.23 per share, much lower than the average analyst's expectation of $0.24 per share. The reduction in full-year profit estimates was due to lower Medicare reimbursements and higher costs of some generic drugs.

Walgreen also felt the challenging environment in its own business. The company lowered its full-year outlook because of a lower gross profit margin driven by fewer higher-profit new generic drugs and an increase in promotions. 

In contrast, CVS is more optimistic about its future. CVS raised its full year 2013 non-GAAP EPS from $3.90-$3.96 per share to a range of $3.94-$3.97 per share, beating the analysts' estimates of $3.96 per share.CVS expects to generate around $4.8 billion to $5.1 billion in free cash flow, driving shareholders value in the long run.

Which is the best buy now?
Interestingly, income investors might like CVS the most with its total cash return to shareholders. At the current price, CVS offers investors a 1.30% dividend yield, with a conservative payout ratio of only 23%. CVS has used the majority of its earnings to buy back its own shares from the market. In the past three years, the company has completed a 260 million share repurchases in the open market, generating an internal rate of return at around 24%. For the full year, it plans to return around $5 billion in both dividends and share repurchases. Recently, the company announced a new $6 billion share repurchase program, effectively giving investors 7.10% in buyback yield.

Walgreen gives investors a much higher dividend yield at 2.20%, but also a much higher payout ratio at 45%. If CVS paid the same percentage of earnings into dividends, its dividend yield would reach more than 2.54%.

Rite Aid is different from those two bigger peers, offering no dividends at all, as it has kept its focus on business restructuring and remodeling. In fiscal 2014, Rite Aid expected to complete 14 relocations, and remodeled around 400 Wellness stores, generating a positive free cash flow of $250 million to $300 million. Moreover, Rite Aid could increase its operating performance by cost control and improve operational efficiencies.

In terms of valuation, Walgreen is the most expensive with an EBITDA (earnings before interest, taxes, depreciation and amortization) multiple of 11.4. While CVS ranks second with 9.4x EBITDA multiple, Rite Aid is the cheapest at around 8 times its EV/EBITDA.

My Foolish take
Rite Aid seems to be a good turnaround stock to invest in for long-term investors, due to its ongoing remodeling initiatives, cost management, and customer loyalty program. However, it might not fit well in income investors' portfolios because of its lack of a dividend payment. Among the three, I like CVS the most, with its juicy cash return to investors and a reasonable valuation. Moreover, CVS will edge higher with its better-than-expected retention of scripts, gained from the Walgreen--Express Scripts dispute.