1 Top Dividend Stock to Consider
Despite running a massively successful business, Walgreens Boots Alliance Inc (NASDAQ:WBA) stock hasn’t been an investor favorite lately. Over the past 12 months, shares of WBA stock tumbled more than 20%. That’s quite a sizable move for a large company with over $60.0 billion of market capitalization.
The good news is, because Walgreens still operates on solid fundamentals, the downturn in its share price could be an opportunity for value-seeking investors. And for those who are looking for dividends, the company might have some good news in the next month or so.
Headquartered in Deerfield, Illinois, Walgreens Boots Alliance Inc runs the largest retail pharmacy chain across the U.S. and Europe. Including its equity method investments, the company has more than 13,200 stores located in 11 countries.
At the same time, Walgreens also runs a huge global pharmaceutical wholesale and distribution business. The company’s network consists of more than 390 distribution centers delivering to over 230,000 pharmacies, doctors, and hospitals in more than 20 countries around the world.
Running a pharmacy chain may not be an exciting business, but the business is capable of paying an increasing stream of dividends to shareholders.
Consider this: Walgreens has raised its dividend every year for the past 42 years. That makes WBA stock a “dividend aristocrat,” which is a title reserved for companies with at least 25 consecutive years of annual dividend increases. (Source: “Dividends,” Walgreens Boots Alliance Inc, last accessed June 14, 2018.)
Paying $0.40 per share on a quarterly basis, WBA stock offers an annual dividend yield of 2.5%.
Rising Dividends Backed by a Rock-Solid Business
But to be honest, the company’s impressive dividend increase track record shouldn’t really come as a surprise. The pharmacy chain business is known for being recession-proof because the demand for it is relatively inelastic to how the economy is doing.
When the economy enters a downturn, people probably won’t be buying as many new cars as before. However, when they need medication, they will likely still visit their neighborhood pharmacy and fill the prescription. And that’s why the retail pharmacy industry is one of the best places for investors to earn recession-proof dividends.
Moreover, it’s hard for new entrants to break into the business. In order to compete with Walgreens Boots Alliance, a company would need to set up an equally expansive pharmacy chain network and convince millions of customers to switch.
In other words, the business has high barriers to entry. With limited competition, existing players like Walgreens can keep earning oversized profits.
Of course, with the recent double-digit pullback in WBA stock, you might think that the company’s business must be slowing down. But that’s not really the case. As a matter of fact, Walgreens has been expanding its presence in the industry.
Over the last three years, the company has grown its prescription market share by over 200 basis points. And thanks to promotions, cost reductions, and transforming of its merchandising and product mix, Walgreens expanded its retail front-end gross margin by more than 300 basis points during this period. (Source: “Fiscal 2018 Second Quarter Results,” Walgreens Boots Alliance Inc, last accessed June 14, 2018.)
Walgreens Boots Alliance Inc Delivers Growing Financials
Ultimately, dividends come from profits. In order for WBA stock to continue its dividend growth track record, the company needs to generate a growing business.
On that front, there has been some good news. In the second quarter of its fiscal year 2018 ended February 28, 2018, Walgreens generated $33.0 billion in revenue, up 12.1% year-over-year. (Source: “Walgreens Boots Alliance Reports Fiscal 2018 Second Quarter Results,” Walgreens Boots Alliance Inc, March 28, 2018.)
The bottom line turned out to be even more impressive. For the quarter, the company’s adjusted earnings came in at $1.72 per diluted share, representing a 27.2% increase from the year-ago period.
In the first half of the company’s fiscal year 2018, sales grew 10% year-over-year to $63.8 billion, while adjusted earnings increased 22.4% year-over-year to $3.01 per diluted share.
Now, keep in mind that Walgreens declared total dividends of $0.80 per share for the first half of the fiscal year. With adjusted earnings of $3.01 per share, the company achieved a payout ratio of 26.7%, leaving a wide margin of safety.
And the best could be yet to come. During the latest earnings conference call, management also raised their guidance. For full-year fiscal 2018, management expects Walgreens to earn an adjusted net income of between $5.85 and $6.05 per share. At the midpoint, that would represent a 16.7% increase from the $5.10 per share earned in its fiscal year 2017.
Get Ready for Another Dividend Increase
After 42 years of annual dividend increases, the company will likely want to continue that track record. The board of directors usually reviews its dividend policy in July. Given its durable business model, growing financials, and low payout ratio, I expect Walgreens Boots Alliance Inc to announce its 43rd consecutive dividend hike in the next few weeks.