Winning With Defense

11/05/2009 12:21 pm EST

Focus: STOCKS

Charles Carlson

Editor, DRIP Investor

Charles Carlson, editor of the DRIP Investor, likes Walgreens’ new prescription for success.

Patience is a virtue, especially when it comes to investing. True, too much patience can lead you to hold on to bad stocks too long. But quality stocks with strong market positions, excellent finances, and steady dividend growth usually come back. Such is the case with Walgreens (NYSE: WAG).

Walgreens operates more than 7,000 drugstores in all 50 states and Puerto Rico. The company also is the largest manager of worksite health and wellness centers. The stock was virtually unstoppable for most of the 1990s, rising from a split-adjusted price of less than $3 in 1990 to approximately $30 by the end of 1999.

This decade has not been so kind. These shares have traded sideways to lower for much of the past nine years. A slowdown in earnings growth, increased competition, and a fear of over-expansion took the shine off.

The stock fell below $22 earlier this year but has rebounded smartly since March. Fueling the gains has been an overall improvement in the stock market. Walgreens has also helped its own cause. The company recently announced a $2 billion share repurchase plan. The buyback plan is a nice signal that the company views the stock has a good value.

Walgreens has also been boosting its dividend aggressively. The company recently increased the quarterly dividend more than 22% to $0.1375 per share. The company has now raised dividends in each of the last 34 years.

Another move that Wall Street welcomes is a more judicious store expansion plan. By scaling back store expansion and focusing on improving existing stores, the company is taking a page from the same successful playbook that jump-started McDonald’s stock price after a long slumber.

To be sure, health-care reform presents uncertainties, but Walgreens should see its customer base expand with any move to broaden health-care coverage. And the company’s care clinics and wellness centers stand to benefit from reform moves.

Walgreens stock has been making a series of new 52-week highs in recent trading. A strong move above $40 would be especially bullish. [The stock traded just below $40 Thursday morning—Editor.] I like these shares—the stock is one of my largest DRIP holdings—and expect these shares to at least match the overall market over the next 12 months.

Walgreens offers a direct-purchase plan whereby any investor may buy stock directly from the company.

Minimum initial investment is $250. The firm will waive the initial minimum if an investor agrees to automatic monthly investment via electronic debit of a bank account of at least $50.

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