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Work Hours
Monday to Friday: 7AM - 7PM
Weekend: 10AM - 5PM
Introduction
Walgreen Boots Alliance (WBA) is a Dividend Aristocrat that was founded in 1901 in Deerfield Illinois.
WBA are present in over 25 countries and own brands such as Walgreens, Duane Reade, Boots, and Alliance Healthcare brands.
From a UK and Irish perspective, we will be more familiar with the boots brand, which is pleasing for me as I did not know they were part of this group and I shop there quite a bit.
WBA operate in 3 main Business Segments
- Retail Pharmacy
- Retail Pharmacy International
- Pharmaceutical Wholesale
Management
On the 27th July 2020, Walgreens Boots Alliance announced plans to appoint a new CEO. The current CEO, Stefano Pessina has decided to step down.
Pessina will assume the role of executive chairman and James Skinner will step down as executive chairman but remain on the board to facilitate a smooth leadership transition.
However I don’t have much more to say here until a new CEO steps in.
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Business Analysis
For fiscal 2019, Retail Pharmacy USA generated 75% of revenue with $104.5 billion. Pharmaceutical Wholesale generated 16.6% with $23.1 billion and Retail Pharmacy International with the remaining 8.4%.
Retail Pharmacy USA
WBA is a market leader in this segment within the US. In 2019 approx 78% of the population lived within five miles of a Walgreens, Duane Reade or acquired Rite Aid retail pharmacy
The Company filled a total of 843.7 million prescriptions in this segment in fiscal 2019. This is just over 2.5 prescriptions per person in the United States of America.
However Gross profit margin and gross profit are impacted by both the percentage of prescriptions filled that are generic and the rate at which new generic drugs are introduced to the market.
Because any number of factors outside of the Company’s control can affect timing for a generic conversion, the Company faces substantial uncertainty in predicting when such conversions will occur and what effect they will have on particular future periods.
Retail Pharmacy International
WBA Retail Pharmacy International operated 4,605 retail stores as of August 31, 2019. They have also been increasing its online presence, in recent years, particularly with Boots.
In the United Kingdom, through the boots.com website the ‘order and collect’ service allows customers to order from a range of over 33,000 products by 8:00 p.m. and collect from noon the following day from approximately 97% of the United Kingdom’s retail stores
Sales are more seasonal in this segment with Christmas time being particularly busy. However Gross profit margin and gross profit are impacted by the highly competitive nature of the health and beauty category. Pricing actions and promotional offerings along with the customers’ desire for value make this a very tough market.
Pharmaceutical Wholesale
The Pharma Wholesale segment consists of the Alliance Healthcare wholesaling and distribution. They also have a considerable equity stake in AmerisourceBergen.
This division supplies medicines, other healthcare products, and related services to more than 115,000 pharmacies, doctors, health centers, and hospitals each year from 300 distribution centers based mainly in Europe.
In addition, Gross margin is impacted by governments who typically look to reduce the growth in prescription drug consumption. Generic drugs can also have a negative impact but WBA gross margins are nearly equal on generic and branded drugs.
Company Growth
Revenue has been increasing steadily since 2011 with a CAGR of 7.34%. During the same period Earnings have grown with a CAGR of 4.34%. A little bit of a worry is that since the acquisition of Boots Alliance Earnings have stalled a little bit since 2015.
Fiscal 2020 Q3 Earnings Results
Sales increased 0.1 percent to $34.6 billion, up 1.2 percent on a constant currency basis, led by Retail Pharmacy USA comparable sales growth of 3.0 percent
Operating loss of $1.6 billion, compared to operating income of $1.2 billion a year ago, mainly due to the non-cash impairment charges of $2 billion in Boots UK; Adjusted operating income decreased 46.5 percent to $919 million on a reported basis, down 46.4 percent on a constant currency basis
Earnings per share was $1.95, compared to EPS of $1.13 a year ago; Adjusted EPS decreased 43.8 percent from $1.47 to $0.83, down 43.4 percent on a constant currency basis; Results reflect $0.61 to $0.65 per share the estimated operational impact from COVID-19
WBA DIVIDEND History
Walgreens Boots Alliance and its predecessor company Walgreen Co have an impressive dividend history. More than 87 years of constantly paying a dividend while raising them in the last 45 years. WBA are well on their way to becoming a dividend king.
Walgreens Boots Alliance typically pays dividends in March, June, September, and December. On the 9th of July 2020 the board of Directors approved a 2.2% increase for a quarterly dividend of $0.4675 per share.
Check out the below chart from IOCHARTS.IO
Payout Ratio
The Payout Ratio is a good indicator of the sustainability of dividends. I have discussed the different methods for calculating the Payout Ratio here.
It is nice to see that the dividend is covered by both earnings and cash flow. Earnings payout ratio is currently around 41% and the FCF payout ratio is slightly lower at 38%. Looking at the last 10 years WBA like to keep the payout ratio between 30% and 40% so there is plenty of room for more dividend growth in the future
WBA Dividend Growth
Companies that generate sustainable earnings growth often make the best dividend companies, as it is easier to lift the dividend when earnings are rising.
Part of my Investment thesis is to invest in companies that show a good history of increasing dividends but also show good potential to continue to raise them.
Over the last 15 years WBA had an impressive Dividend Growth Rate of 16.1%. however this has been dropping and is more noticeable in the chart below for the last 6 years where the average is hovering around 6%
The latest increase of 2.2% is well below average and a level I have not seen from 1999. However, bearing in mind that we are in a pandemic , 2.2% is not bad. I believe we will see future increase around the 5% mark in the future.
WOULD I BUY THIS COMPANY
Please see my disclaimer before reading on. These are my thoughts and are not to be used as investment advice. I am simply outlining my thought process when deciding if I should buy a company or not. Please do your own due diligence and check all data for your self.
This will be broken into 6 different sections with the maximum points per section are outlined below.
| Section | Max Points |
| Financial Strength & Future Proof | 25 |
| Management Quality | 15 |
| Dividend Quality | 20 |
| Valuation | 20 |
| Story of the Stock | 15 |
| Momentum (TA) | 5 |
| Total | 100 |
A recommendation is than provided based on the over all score out of 100.
European DGI was kind enough to share this model with me and he also has a spreadsheet made that you can find here!
Financial Strength and Future Proof
WBA scored a respectable 17 out of 25 in this section. Some of the positives include a low debt to equity ratio of 0.4, increasing cashflow, and a very strong payout ratio for EPS and FCF.
Even though the debt/equity ratio is low, they did take on alot more debt with the acquisitions of Boots and Rite aid. This has givin morning star an Investment grade BBB level which means they are a moderate credit risk.
Earnings per share the only negative in this section is the EPS growth over the last 5 and 10 years
Management
WBA are in a bit of changeover period, But this section also looks at how a company performed during difficult times and the capex/FCF ratio. It also looks at previous acquisitions and how they have performed. All in all I am quiet happy with the current managements integrity and dividend increase during this difficult time. WBA scores 11 points in this section.
WBA High Dividend Quality
Nearly full marks in this section. I reckon it will take under 12 years for the yield on cost to reach 10%. The current dividend yield of over 4% is more than 200% better than the average yield of the S&P 500. The only blip in this section is that the dividend growth rate has not been as good in the last 5 years compared to the previous 5 years. the score is a solid 18 in this section.
Valuation
PE ratio
Looking at the current TTM PE ratio, WBA would look grossly overvalued at 48 times earnings. However, as noted above there was a 43% drop in earnings due to the impact if COVID. This is expected to improve and the forward PE ratio is expected to be around 8 times the earnings. Historically over the last 9 years the average pe ratio has been 18 x earnings. This would make them undervalued from a PE point of view
DDM
Using my multistage discount model the current estimated price is $52.50 which means the company is Walgreens are 21.6% undervalued. A DCF model was calculated on https://www.stock-analysis-on.net/ which produced a fair value of $66.93.
Overall Walgreens Boots Alliance appear to be under valued at current prices and this section scored 15/20
Story of the Stock
In this section, I look at the market place in general, is it stable, can the company continue to grow? Do they Innovate and how efficient is there organisation. I also look at the overall share count, Are they reducing this over the last 5 years?
In general I think the market place is competitive but stable and the company does have the ability to grow further through acquisitions like we have seen in the past. Overall in the last 2 sections they scored a combined score of 11 to bring their score up to a total of 71
Recommendation
My Scoring recommendations are as follows
| Recommendation | Score |
| Strong Buy | 90 – 100 |
| Buy | 70 – 90 |
| Hold | 50 – 70 |
| Sell | 30 – 50 |
| Strong Sell | 0 – 30 |
With a current score of 71, Walgreens Boots Alliance gets a buy recommendation. The Dividend appears to be safe and the company is attractively valued. However, there are concerns over future earnings. I believe a brand as big as WBA can overcome these issues and can continue to grow in the future
Hope you enjoyed this review, If you did, please consider joining my community by signing up to my mailing list where I will keep you up to date with my investments and provide more analysis like this.
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I also Co-host a podcast called Dividend talk where I chat with European DGI about Dividend growth Investing. Feel free to listen to our latest episode below
Thank you for reading this far and feel free to drop any comments below. Happy Investing!
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[…] In that episode I mentioned that I’m typically using my gDoc template to analyze a company before I really pull the trigger to initiate a position. EMF liked that template a lot and he started to use it for his own stock analysis. […]
I like the dividend qualities of this co.
The net debt is quite high.. about 9 times current cashflow (ignoring plant, machinery, property etc).
Quite a fall in share price from its heights ($96) around July 2015. Currently $36.
Anyone have ideas for this?
Is it the debt or.. the threat of cheap white label products from Amazon?
I think it’s a mixture of high level of debt and the threat form amazon to be honest. But the price is fallen and looks like it will fall some more. If your confident long term its a good entry point now
WBA is on my list for a long time, but the long trend downwards is scary.
What I currently try to understand is if high management understands the concerns of the market (will look for recent CEO interviews) and what they do to bring some new energy in the company (not the CEO change but investments).
What I saw in they latest presentation is that they want to open “neighborhood health destinations” (slide 19*). And I like the idea: their store could benefit for more people stopping by because they are getting basic medical services/treatment and could immediately buy drugs for the treatment. They plan 500…700 co-locations are <10% of their ~9000 stores in the US. Is that a good start to make a difference?
* https://s1.q4cdn.com/343380161/files/doc_presentations/2020/07/3Q20-Deck-Final.pdf
So, I contacted WBA IR team regarding the “neighborhood health destinations”. My questions were: 1) Any details to their roll out plan of the 500…700 locations, and 2) if they had any studies how that would increase their sales. Today – 1 month later – they answered. Better late than never and I really appreciate that they answered personally (does not seem to be a script / copy & paste)
Here their response:
“In response to your questions below:
1) The plan is to roll-out 500-700 stores in the next five years, although we have not publicly disclosed the specifics of our roll out plan yet. However, we can see this partnership expanding further physically and digitally. We did publicly state that more than 50% of locations will be located in Health Professional Shortage Areas and Medically Underserved Areas/Populations. Also, we report earnings next Thursday and typically give an update on strategic priorities at that time.
2) Yes, we did operate trial locations in Houston and they were very successful with Net Promoter Score of 90. Our expectation, as stated in prior public statements, is that we will capture ~50% of scripts from VillageMD locations. Further, we see synergies between primary care physicians and pharmacists under the same roof. Other benefits from these locations include a more focused front end offering surrounding Health & Wellness and Beauty, in addition to receiving a licensing fee from these locations
Lastly, for some additional background on Village Medical, it may be helpful to visit their website: https://www.villagemedical.com/ where they provide stats on adherence/cost of care/outcomes/etc, and outline details on their business model which is a mixture of fee for service & capitative care.”
[…] lower dividend growth rate with a Low yield and higher growth rate. I added to my position in $WBA, you can check out my review here. I also added to my position in reality Income. There is just something about monthly paying […]
[…] WBA are a dividend Aristocrat with a 44 year history of increasing dividends. The stock price is free falling at the moment but this could be a good chance to get a quality on the cheap. you can find my review of the company here. […]