Walgreens Boots Alliance Inc: Dividend Aristocrat Trading at a Discount
If You Are a Value-Conscious Investor, Read This
Over the years, few companies have served income investors better than the S&P 500 Dividend Aristocrats.
To become a “Dividend Aristocrat,” a company needs to be an S&P 500 component and must have increased its dividend every year for at least 25 years.
A quarter of a century of annual payout increases is no easy feat, especially when you take into account all the ups and downs in our economy during this period. Among all S&P 500 companies, only 57 currently have this title.
This also means that, if an investor bought shares of a Dividend Aristocrat decades ago and held them until this day, that investor would have enjoyed annual pay raises in the form of higher cash dividends from the company for at least 25 consecutive years.
Therefore, it shouldn’t come as a surprise that these Dividend Aristocrats have become extremely popular for investors. Think about it: if you were to build a long-term dividend portfolio, wouldn’t you pick companies that can raise their payouts through thick and thin?
Due to high investor enthusiasm toward them, Dividend Aristocrats have gotten a lot more expensive as time has gone by. In just the last five years alone, the S&P 500 Dividend Aristocrats index—an equal-weighted index that measures the performance of the S&P 500 Dividend Aristocrats—surged more than 50%.
S&P 500 Dividend Aristocrats Index
Chart courtesy of StockCharts.com
Obviously, if you held onto shares of companies in this index during this period, you would have made some decent profits. But what if you are just getting started in dividend investing and want to put money in solid dividend growth stocks?
Well, the rise in the index over the years simply means that many of the Dividend Aristocrats have gotten expensive.
That’s why today I want to talk to you about a relatively inexpensive way to tap into top-notch dividend growth: Walgreens Boots Alliance Inc (NASDAQ:WBA).
Walgreens Boots Alliance Inc
If you live in the U.S. or Europe, chances are you have seen some of the company’s stores. WBA’s retail and business brands include “Walgreens,” “Duane Reade,” “Boots,” and “Alliance Healthcare.” Combined, the Deerfield, Illinois-based company has over 18,500 stores in 11 countries around the world.
At the same time, Walgreens Boots Alliance operates one of the largest pharmaceutical wholesale and distribution networks in the world. It has over 390 distribution centers delivering to more than 230,000 pharmacies, hospitals, and medical professionals in more than 20 countries. (Source: “About Us,” Walgreens Boots Alliance Inc, last accessed February 22, 2019.)
Thanks to the company’s well-established business and deeply entrenched market position, it can afford to return cash to investors on a regular basis.
Right now, Walgreens Boots Alliance pays quarterly dividends of $0.44 per share, giving WBA stock an annual yield of about 2.5%.
Sure, you can find plenty of stocks with higher yields. What makes this pharmacy chain operator stand out, though, is the company’s consistent dividend growth.
Walgreens Boots Alliance and its predecessor company Walgreen Co have raised their cash dividend payments to shareholders every year for 43 consecutive years. In just the last five years, the company’s quarterly dividend rate has grown by nearly 40%. (Source: “Dividends,” Walgreens Boots Alliance Inc, last accessed February 21, 2019.)
Not an Expensive Dividend Aristocrat
And since Walgreens is also an S&P 500 component, 43 years of annual dividend hikes mean it has already earned the prestigious Dividend Aristocrat title.
The neat thing is, while the Dividend Aristocrats have gotten expensive as a group due to the stock market rally in recent years, WBA stock didn’t really shoot through the roof.
In fact, for most of the last five years, shares of this pharmaceutical retailer have been trading sideways.
As a result, WBA stock is a unique find in today’s market; it’s a Dividend Aristocrat that actually offers good value for money.
Consider this: Trading at $70.74 per share at the time of this writing, Walgreens Boots Alliance has a price-to-earnings (P/E) ratio of 13.5 times. This is lower than the drug retailer industry average P/E multiple of 18.6 times. (Source: “Walgreens Boots Alliance Inc (WBA.OQ),” Reuters, last accessed February 22, 2019.)
Furthermore, the company’s price-to-sales and price-to-cash-flow ratios are significantly lower than the industry averages. (Source: Ibid.)
Of course, having a cheaper valuation than one’s peers is not always a good sign. Sometimes market participants put a lower valuation on a stock because its business is deteriorating.
But that’s not the case at all for Walgreens. In fact, if you take a look at the company’s financials, you’d see that the business is still firing on all cylinders.
Running a Growing Business
In Walgreens Boots Alliance’s fiscal-year 2018, which ended August 31, 2018, the company generated $131.5 billion in sales, representing an 11.3% increase from the prior fiscal year. The bottom line was even more impressive, with adjusted earnings coming in at $6.02 per share, marking an 18% improvement year-over-year. (Source: “Walgreens Boots Alliance Reports Fiscal Year 2018 Results,” Walgreens Boots Alliance Inc, October 11, 2018.)
The company’s growth momentum has continued to fiscal-year 2019. In the first quarter, which ended November 30, 2018, Walgreens’ top line grew 9.9% year-over-year to $33.8 billion. The company earned an adjusted net income of $1.46 per share for the quarter, up 14.1% from the $1.28 per share earned in the year-ago period. (Source: “Walgreens Boots Alliance Reports Fiscal 2019 First Quarter Results,” Walgreens Boots Alliance Inc, December 20, 2018.)
What these numbers also reveal is how safe the company’s dividend is.
In fiscal-year 2018, Walgreens declared total dividends of $1.64 per share. That’s a small fraction of its adjusted profit of $6.02 per share earned during the year.
In the first quarter of fiscal-year 2019, the company’s adjusted earnings of $1.46 per share easily covered its quarterly dividend rate of $0.44 per share. So again, the payout remained safe.
The Bottom Line on WBA Stock
There you have it. Despite being a member of the elite Dividend Aristocrats club, Walgreens Boots Alliance Inc actually trades at an attractive valuation compared to its industry averages.
The company has also been growing at a rapid pace and has no problem covering its rising dividend payments. For value-conscious investors who are seeking dividend growth, WBA stock should be near the top of their watchlist.