Walgreens Boots Alliance (WBA) is the second largest publicly traded pharmaceutical retailer based on its $48 billion market cap; only rival CVS Health (CVS) is larger, explains Ben Reynolds, editor of Sure Dividend.

Walgreens is a Dividend Aristocrat thanks to its 45 consecutive years of dividend increases. The company has put together solid adjusted earnings-per-share growth of 6.7% annually from fiscal 2011 through fiscal 2020. 

We recommended Walgreens at the beginning of 2021 because of its low valuation and high yield. The company’s stock was trading for a low price-to-earnings ratio of around 8 based on our expected adjusted earnings-per-share for fiscal 2021 of $4.98. 

For comparison, the company’s historical average price-to-earnings ratio over the last decade is around 15. The stock’s low valuation pushed its dividend yield up.

At the time of our write-up for our initial 2021 recommendation, Walgreens stock had a dividend yield of 4.7%.  And the dividend was well covered, with a payout ratio of under 40% using expected 2021 adjusted earnings-per-share. 

Walgreens stock has performed very well so far in 2021, generating total returns of 41.2% so far this year (through 6/11/21), versus 13.9% for the S&P 500 ETF (SPY). The company has had several noteworthy developments through the first 6 months of 2021.

First, on January 7th, the company announced Q1 2021 earnings. Revenue grew 5.7% versus the same quarter a year ago.  Adjusted earnings-per-share declined 11.2%, largely due to the impact of COVID-19. Walgreens also announced it will be accelerating its VillageMD investment to support the opening of 600 to 700 Village Medical primary care clinics at Walgreens over the next 4 years.

In the same press release, Walgreens also announced that AmerisourceBergen (ABC) would acquire the majority of Walgreen’s Alliance Healthcare business for ~$6.5 billion. Walgreens announced that this deal closed on June 2nd.  The company used proceeds to eliminate $3.3 billion in debt from its balance sheet.  The remainder of the proceeds will be used for investment and growth purposes.

Walgreens made a big change to its management team on March 15th.  Rosalind Brewer succeeded previous CEO Stefano Pessina. Then, on March 31st, Walgreens announced its Q2 2021 earnings. 

Sales from continuing operations increased 4.6%, while adjusted earnings-per-share from continuing operations declined 10.1%. Management raised guidance for the year to mid-to-high single digit growth for adjusted earnings-per-share for both continued and total operations.

Walgreens shares have increased significantly since the beginning of the year. This has brought the stock to a price-to-earnings ratio of 11.1 using our new expected fiscal 2021 adjusted earnings-per-share of $5.00.

This is still far below the company’s 10 year historical average price-to-earnings ratio, but better reflects the company’s struggles over the last few years — adjusted earnings — per-share peaked at $6.02 in 2018.

As the share price has increased, the stock’s dividend yield has come down as well. It’s now at a still relatively high 3.4%.  We don’t believe Walgreens stock to be the value play it was at the beginning of the year.

But it is still a quality dividend growth stock trading with a  3%+ yield and a relatively low price-to-earnings ratio. And the company will likely continue increasing its dividend in the future. As a result, we rate Walgreens as hold for at current prices.

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