Walgreens Boots Alliance (WBA) is the largest retail pharmacy in both the U.S. and Europe —  with a presence in 9 countries and has about 13,000 stores in the U.S., Europe, and Latin America, notes Ben Reynolds, income investing specialist and editor of Sure Dividend Top 10 Elite.

Through its flagship Walgreens business and other business ventures, the $28 billion market cap company; it operates several brands, with Walgreens and Duane Reade collectively making up the vast majority of locations. Walgreens generates about $135 billion in annual revenue.

In the third quarter of fiscal 2022, Walgreens’ sales from continuing operations dipped 4% and its adjusted earnings-per-share decreased 30% over the prior year’s quarter, from $1.37 to $0.96, mostly due to peak COVID-19 vaccinations in the prior year’s period. Earnings-per-share exceeded analysts’ consensus by $0.03. The company has beaten analysts’ estimates for 8 consecutive quarters.

Walgreens reiterated its guidance for low single-digit growth of its annual earnings per share. However, the stock has fallen 37% this year due to concerns over the fading tailwind from the pandemic and the recent acquisition of One Medical, an operator of a membership-based primary care platform, by Amazon (AMZN) for $3.9 billion.

This strategic move by Amazon is likely to intensify competition in the pharmaceutical business. Moreover, Walgreens decided to retain its Boots business, having failed to receive an attractive bid.

Safety & Dividend Risk Analysis

Walgreens’ competitive advantage lies in its vast scale and network in an important and growing industry. In the Great Recession, earnings-per-share slipped only 7% and the dividend kept rising. The stock is offering a 10-year high dividend yield of 5.9%. Given the healthy payout ratio of 36% and resilience to recessions, the dividend appears safe.

Growth, Value & Expected Total Return Analysis

Walgreens has grown its earnings-per-share by ~9% per year on average over the last decade. This was driven by a combination of factors including solid top-line growth (7% average annual growth), net profit margin expansion, and a modest reduction in the number of shares outstanding.

Over the intermediate term we are using a 3% anticipated growth rate, expecting some sort of recovery towards post-COVID normal, along with a return to share repurchases.

Shares are presently trading hands at 6.2 times our estimate of 2022 earnings. Our fair value multiple is 10.0 times earnings, indicating the potential for a 10.1% annual tailwind from the valuation. When combined with the 5.9% starting dividend yield and 3% anticipated growth, this implies the potential for 17.2% in annual total returns.

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