Walgreens: Value or Trap?

03/20/2019 5:00 am EST


Briton Ryle

Editor, The Wealth Advisory

Walgreens Boots Alliance (WBA) was on a nice run when we bought in back in October. But that all changed in December, observes Brit Ryle, blue chip specialist and editor of The Wealth Advisory.

So what caused its drops? Well, part of it was beta — that’s just correlation to the market. And the market was dropping late last year.

But there were catalysts working against Walgreens, too. It — along with CVS (CVS) — are being sued by the State of Florida over the opioid crisis. Goldman Sachs (GS) also downgraded the stock in December on concerns that its retail pharmacy business is starting to crumble.

And although the company beat earnings expectations for 1Q2019, management’s cost-cutting plans were not well received by investors, and the stock fell a bit more after that.

That brings us to 2019. Things were looking good. WBA was getting into agreements with lots of companies to lower costs and grow revenues. But then bad news started to trickle through again.

News that the President will be targeting prescription drug prices is weighing on the whole industry. And the FDA is banning a bunch of Walgreens stores from selling tobacco. Oh, and Amazon (AMZN) is getting into brick-and-mortar retail.

So there are a few headwinds. And there’s a reason for the stock to be down some. But is there a reason for it to be down this much? First, we’ve got to look at the dividend. Is it safe? Well, for the industry, a safe coverage ratio — how much of the free cash flow goes to covering dividend payments — is about 40%.

Right now, Walgreens uses about 26% of its free cash flow to pay the dividend. That’s very safe. It’s not getting cut. And it can come up easily from there, too.

Balance sheets are also important, too. So how is Walgreens’ debt looking these days? The company has a little more debt than I’d like to see. It’s leveraged about 3.3 times forward EBITDA. But that’s still very low compared to the rest of the market — 25% of companies out there are levered 6 or more times over.

And Walgreens is getting a great return on its invested capital at 14%. Not to mention it covers its interest payments 11 times over with pre-tax earnings. Add into that management’s commitment to deleverage, and you’ve got a company that’s looking like its price and value have a massive disconnect.

Walgreens is down for a reason. But it’s not a broken company. It’s got a relatively strong balance sheet and should have no problem clearing up the minor blemishes.

It’s got 43 straight years of dividend hikes, and that’s not going to end anytime soon. And it’s got a straight path to continuing long-term growth through its years of strategic pharmacy expansion.

Analysts are looking for 10% cash flow growth over the next five years. Combine that with its growing  dividend, and you’re looking at a 15% to 20% overall return.

It’s not flashy, but it’s just the kind of company you want in your corner when you’re getting closer to retirement and want that guaranteed income and steady growth.

Walgreens is very undervalued right now. Buying shares at these prices locks in a 3% yield. Even with its 43 years of hikes, that’s historic. There have only been about three times in Walgreens’ history when the yield has been this high.

I highly recommend adding shares and locking in these low prices and high yields. They’re not going to stay this low and that high for long.

Subscribe to Brit Ryle's The Wealth Advisory here…

Related Articles on HEALTHCARE

Keyword Image
Zoetis: Healthcare for Pets
09/21/2020 5:00 am EST

The most alluring quality of the pet industry for investors is consistency. Americans are expected t...