Company Description: Walgreen Co. is the largest U.S. retail drug chain in terms of revenues, this company operates more than 8,000 drug stores throughout the U.S. and Puerto Rico.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
WAG is trading at a discount to 1.), 2.) and 3.) above. The stock is trading at a 35.8% discount to its calculated fair value of $54.67. WAG earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
WAG earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. WAG earned a Star for having an acceptable score in at least two of the four Key Metrics measured. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2002-2005, 2003-2006, 2004-2007, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1933 and has increased its dividend payments for 37 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
WAG earned a Star in this section for its NPV MMA Diff. of the $39,079. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as WAG has. The stock's current yield of 2.71% exceeds the 2.6% estimated 20-year average MMA rate.
Memberships and Peers: WAG is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company's peer group includes: CVS Caremark Corporation (CVS) with a 1.4% yield, Rite Aid Corp. (RAD) with a 0.0% yield and Wal-Mart Stores Inc. (WMT) with a 2.1% yield.
Conclusion: WAG earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks WAG as a 5-Star Very Strong stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $182.98 before WAG's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 37 years of consecutive dividend increases. At that price the stock would yield 0.5%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 5.1%. This dividend growth rate is well below the 20.0% used in this analysis, thus providing a significant margin of safety. WAG has a risk rating of 1.50 which classifies it as a Low risk stock.
With over 8,000 drugstores, WAG offers unmatched convenience with one of the the most recognized brand names in the retail pharmacy business. The company enjoys a strong market share within the relatively stable U.S. retail drug industry.
However, the brief period that WAG was not part of the Express Scripts' ESRX pharmacy network cost the company dearly. First, It lost 85% of sales to Express Scripts members. There is a question as to how much of the $4 billion worth of lost sales WAG will be able to recapture. Secondly, and quite possibly more damaging, the companies learned that WAG needed Express Scripts more than Express Scripts needed WAG.
Industry mergers including Express Scripts and Medco along with SXC Health Solutions and Catalyst Health Solutions have weakened WAG's bargaining position. In addition, competitors such as Wal-Mart and CVS continue to put pressure on WAG's market share.
Although the stock is trading well below my $54.67 calculated fair value and offers a higher yield than its most recent history, I have not yet reached the comfort level that would allow to to buy. Until such time, I will continue to watch and evaluate.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position in WAG (0.0% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
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