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Stock Analysis & Ideas

Walgreens Boots Alliance: Dividend Yield is Now Attractive

Walgreens Boots Alliance (WBA) is a leader in retail pharmacy, dispensing medicines, and accessible, high-quality care globally.

The company serves its customers through its 13,000 stores in the U.S., Europe, and Latin America. Further, Walgreens is one of the largest buyers of prescription drugs and many other health and well-being products in the world. Therefore, through the sheer scale of its operations, Walgreens is aiming to address the ever-increasing cost of prescription drugs.

Part of Walgreen’s updated strategy last October includes the company becoming a prominent provider of local clinical care services through leveraging its consumer-centric technology and pharmacy network to offer value-based care access to its customers.

Walgreens shares have been marching lower over the past year, with the ongoing market sell-off pushing the stock near its 52-weak lows. However, the company’s performance has been improving lately, with profitability levels breaching new records over the past few quarters.

Due to the stock’s discounted valuation and elevated dividend yield following the ongoing decline, I have now turned bullish on Walgreens Boots Alliance.

Strong Profits

Walgreens’ profitability has improved dramatically over the past few quarters. Adjusted EPS in the previous quarter grew 25.9% year-over-year to $1.59. Over the first half of Fiscal 2022, Walgreens’ adjusted EPS came in at $3.27, 38.6% higher compared to H1 2021, with net income hovering near all-time high levels for the company.

Performance was boosted by firm execution across all business segments and elevated COVID-19 vaccinations and testing levels. Further, Walgreens enjoyed strong retail comparable sales growth of 14.7% in the U.S., while Boots UK retail comparable sales grew 22% amid share gains across all principal categories.

VillageMD and Shields, two of Wallgreens’ most recent acquisitions, have also been achieving excellent pro forma revenue growth versus their year-ago standalone results, according to management.

Further, the company’s Health segment is on track toward its long-term target. The app now provides secure chat capabilities with health advisors, improved customer access, and overall enhanced convenience.

Net earnings from continuing operations increased by $3.9 billion to $4.5 billion during the first half of Fiscal 2022 compared to the same period last year.

However, note that this figure reflects a $2.5 billion after-tax gain as a result of the valuation of the company’s previously held equity, and debt stakes in VillageMD and Shields and the lapping of a $1.2 billion charge. Profitability has been increasing in real terms, with adjusted gross and operating coming in at 22.8% and 4.4% compared to last year’s 20.7% and 3.4%.

The company reiterated its Fiscal 2022 adjusted EPS expectations of low-single-digit growth. Still, analysts forecast adjusted EPS of $5.04 for the year, implying a 5.11% decline year-over-year.

This is likely due to rising cost assumptions over the next several months. Still, we are looking at another quite profitable year ahead.

Juicy Dividend Yield

Walgreens counts 46 years of consecutive dividend increases. The company’s remarkable dividend growth record qualifies Walgreens as a Dividend Aristocrat.

While Walgreen’s latest dividend hike last summer was by a slim 2.1%, the stock’s yield is presently looming around 4.3%. Thus Walgreens is now amongst the highest-yielding constituents of the Dividend Aristocrats Index.

It’s a rare opportunity to find a high-quality company trading with such a high dividend yield these days.

Further, it’s important to note that even if we assume more or less stable EPS this year, the stock’s payout ratio should stand close to 35%. Hence, the juicy dividend is relatively well covered. Thus, it wouldn’t be unlikely to see Walgreens’ dividend growth pace accelerating at some point moving forward.

Due to the stock’s ongoing decline, Walgreen’s is currently trading at close to 10x its forward earnings, which is near the lower end of its historical average. From another point of view, the stock is trading at a P/B of around 1.4, which is the lowest P/B multiple Walgreens has traded at in its history.

In my view, this multiple is quite attractive and, combined with the 4.3% yield, it should provide investors with a deep margin of safety.

Wall Street’s Take

Turning to Wall Street, Walgreens Boots Alliance has a Hold consensus rating based on one Buy and eight Holds assigned in the past three months.

The average Walgreens price target of $48.78 suggests 8.9% upside potential.

Takeaway

Walgreens’ stock price has underperformed notably over the past few years, and likely rightfully so. However, the combination of record profit levels, single-digit growth expectations, a substantial yield, and an attractive valuation multiple has formed a solid investment case, in my view.

Income-oriented investors are likely to take advantage of Walgreens’ hefty dividend yield and reassuring dividend growth track record, which should result in the stock regaining some of its lost ground.

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