This has been a tough year so far for the stock market, and pharmacy retail stocks such as Walgreens Boots Alliance (WBA +0.00%) aren't immune to the volatility. Walgreens stock is down nearly 8% year to date and currently trading just 7% above the stock's 52-week low. However, investors should keep their eyes on Walgreens in 2016, because there are three catalysts could propel the stock higher from here.
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A more nimble cost structure
Walgreens, which acquired the remaining stake of European drugstore chain Alliance Boots last year to become Walgreens Boots Alliance, is cutting costs across its global business today. Walgreens is closing underperforming stores, restructuring its operations both domestically and abroad, and streamlining its IT systems as part of the company's plan to save $1 billion by 2017.
This, together with strategic acquisitions I'll discuss in a moment, should help Walgreens improve operating margins and fuel earnings growth in the upcoming quarters.
Large and in charge
The market's recent mood swings could destroy smaller pharmacy outfits such as Rite Aid Corporation (RAD +0.00%) that are less equipped to deal with uncertainty both in the healthcare space and the broader market. However, as the largest retail pharmacy in the U.S. and Europe today, Walgreens has the size and scope to weather this storm. Not to mention Walgreens announced a bid last year to buy rival Rite Aid for more than $9.4 billion in cash.
Walgreens alone filled over 16% of all U.S. prescriptions in fiscal 2014 -- and that figure continues to grow. The company's footprint of more than 8,400 stores throughout the U.S. makes it more convenient for consumers to fill their prescriptions there, versus rivals such as Rite Aid, which has half as many stores. If regulators approve the takeover deal, it could significantly boost sales growth for Walgreens, thereby pushing the stock higher.
Importantly, a merger between Rite Aid and Walgreens would also give Walgreens Boots Alliance more leverage with drugmakers and pharmacy benefit managers. This would help the company keep costs down. The deal is on track to close by the end of the year, assuming regulators don't interfere. However, that shouldn't be a problem, since there's still ample competition in the pharmacy space now that big-box stores such as Target (TGT +2.43%) and Wal-Mart are increasing the number of pharmacy clinics within their discount stores.
The Federal Trade Commission, after all, recently approved a deal between Target and CVS Health Corporation (CVS 1.54%), in which CVS purchased the big-box retailer's pharmacy and clinic business. The transaction carried a $1.9 billion price tag. As part of the deal, over 1,660 pharmacies within Target stores across 47 states will be rebranded as CVS locations. If approved, Walgreens' merger with Rite Aid would leave Walgreens with a whopping 13,000 U.S. stores -- significantly more than CVS, which currently boasts a network of roughly 9,600 stores.
The stock is cheap
In addition to the catalysts I've discussed, Walgreens stock is attractively priced at its current market rate of $77 a pop today. The stock carries a price-to-earnings growth rate of 1.3, which is one of the lowest in the industry today. Moreover, shares are trading at just 15 times next year's fiscal earnings. On top of this, Walgreens stock pays an annual dividend of $1.44, which yields 1.88% at its current stock price.
While that might not seem like a lot, Walgreens' payout is a big deal because it offers investors reliable income in an otherwise uncertain market environment. You see, Walgreens has increased its dividend every year for the past 40 years, thereby earning it a reputation as a Dividend Aristocrat. Walgreens' management said the company plans to maintain its steady dividend increases, despite its pending purchase of Rite Aid.
For these reasons, I believe Walgreens Boots Alliance will reward patient shareholders in 2016.
