Prescription Calls for Gains
11/29/2010 8:35 am EST
Charles Carlson, editor of the DRIP Investor, sees Walgreen's recent dividend hike and share rally as harbingers of better times for the pharmacy giant.
In the last four years, Walgreen (NYSE: WAG) shares have trended lower. The company's earnings-growth slowed, which caused growth investors to dump the stock. And investors became weary over the firm's rapid expansion.
More recently, however, the company has issued a spate of good news. For starters, the firm recently boosted its dividend more than 27% to a quarterly rate of $0.175 per share. The size of the dividend increase seems to have garnered the attention of dividend-hungry investors. The dividend increase represented the 35th consecutive year that Walgreen has upped its payout.
The dividend hike helped boost the yield on the stock to its current 2.1%. Other good news includes per-share earnings in the most recent quarter that handily beat Wall Street expectations—the first time the company has beaten the Wall Street consensus earnings estimate since the November 2009 quarter.
The improved results have helped push Walgreen stock to its highest level since May before the recent pullback. Admittedly, Walgreen has had a reputation in recent years of shooting itself in the foot with a soft quarter or monthly sales figure, which has made it a "show me" stock with investors. For these shares to retest their 52-week high of $40.26, Wall Street will need to see at least another quarter or two of better-than-expected earnings.
Can the company deliver? For all of its problems, the company remains a powerhouse in the drugstore sector. At the end of August, the firm had 8,046 locations in all 50 states and Puerto Rico. The company filled a record 778 million prescriptions in fiscal 2010, an increase of 7.5% over the previous fiscal year.
If Walgreen can maintain its recent improvement trend, the stock should be able to pick up additional investor support, especially as dividend-paying stocks gain favor with investors. I would not be surprised to see the stock retest the $40 level over the next 18 months. [Walgreen shares traded near $35 after rising more than 3% today—Editor.]