Walgreens Boots Alliance (WBA) is a pharmacy retailer with over 18,000 stores in 11 countries; the company has increased its dividend for 44 consecutive years, which makes it a Dividend Aristocrats, asserts Ben Reynolds, income expert and editor of Sure Dividend.
Walgreens’ competitive advantage is its leading market share. Its robust retail presence and convenient locations encourage consumers to use Walgreens instead of its competitors. This brand strength means customers keep coming back to Walgreens, providing the company with stable sales and growth.
Consumers are unlikely to cut spending on prescriptions and other healthcare products even during difficult economic times which makes Walgreens very resistant to recessions. Walgreens’ adjusted earnings-per-share declined by just 7% during 2009 and adjusted earnings-per-share actually grew from 2007 through 2010.
Walgreens has a positive long-term growth outlook. The retail pharmacy sector has proven to be resistant to e-commerce and will benefit from the aging U.S. population and rising demand for healthcare. The company also raised its cost-cutting target to over $1.8 billion by fiscal 2022.
Walgreens stock has declined 35% in the past 12 months, and 21% since the beginning of 2020. Based on expected fiscal 2020 adjusted EPS of $6.00, Walgreens stock trades at a price-to-earnings ratio of just 7.8.
We believe Walgreens is valued far too low, based on its strong business model, competitive advantages, and long history of dividend increases. Our fair value estimate is a P/E ratio of 12, which means expansion of the price-to-earnings ratio could add 9.0% to Walgreens’ annual returns through 2025.
In addition, we expect 5% annual EPS growth, and the stock has a 3.9% dividend yield. Overall, Walgreens stock has expected returns of nearly 18% per year over the next 5 years.
