Turning to the balance sheet, Walgreens has about $2.6 billion in cash on hand compared to $13.2 billion in debt. After the deal for Rite-Aid closes, the balance sheet will become a bit overleveraged. Moody’s has placed Walgreens’ credit ratings on review for a downgrade.
While the company’s large acquisitions have increased risk, the company’s consistent cash flow generation reduces some of our concern and easily protects the dividend.
Source: Simply Safe Dividends
Overall, Walgreens’ dividend is very safe for several reasons. The company sells recession-resistant products, maintains low payout ratios, and generates predictable free cash flow. Its iconic brand and convenient store locations will continue to serve it well for many years to come.
Dividend Growth Score
Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
Walgreens’ Dividend Growth Score of 88 indicates that the company has very strong dividend growth potential. Walgreens has increased its dividend for 40 consecutive years and is a member of the dividend aristocrats list. Perhaps even more impressively, Walgreens has paid uninterrupted dividends for 83 straight years.
As seen below, Walgreens has recorded impressive dividend growth. The company’s dividend has increased by 20% per year over its last 10 fiscal years, although growth has slowed to a high-single digit pace more recently.
Source: Simply Safe Dividends
With the company working on integrating several major acquisitions and restoring its balance sheet, dividend growth will likely remain at a mid- to high-single digit pace for the time being.
Walgreens Boots Alliance also targets a long-term dividend payout ratio of 30-35%, which is where the company is at today. In other words, dividend growth will more closely align with earnings growth going forward.
Valuation
WBA’s stock trades at 18.2x forward earnings estimates and has a dividend yield of 1.8%, which is below its five-year average dividend yield of 2.2%.
Investors are betting on Walgreens achieving substantial synergies from its recent acquisitions, which could help drive its earnings growth rate into the high-single digits or low double-digits.
Given the number of moving parts to Walgreens’ story, we think the stock appears to be at least fairly valued today.
Conclusion
The healthcare landscape is rapidly evolving. While more Americans are now insured, driving prescription volumes higher, there is immense pressure to make the healthcare system more efficient and take out costs.
Government-funded reimbursement models are changing and putting pressure on lucrative rates enjoyed in many pharmaceuticals markets. These changes, amongst others, are causing the entire distribution chain that delivers drugs from manufacturers to patients to consolidate.
While Walgreens is much better positioned than its smaller rivals, its large acquisitions of Alliance Boots and Rite-Aid come with integration risks and are a signal of the need for further consolidation to protect profits.
We think Walgreens Boots Alliance Inc (NASDAQ:WBA) is still a blue chip dividend stock, but we would prefer to buy at a more favorable valuation or receive more clarity on how healthcare reform will reshape the business over the next few years.
Disclosure: None
