The Dividend Aristocrats are among the highest-quality dividend growth stocks in the entire market. The Dividend Aristocrats are an exclusive group of 57 stocks in the S&P 500 Index, with at least 25 consecutive years of annual dividend increases. Some stocks on the list have raised their dividends for far longer than 25 years.
For example, Walgreens Boots Alliance (NASDAQ:WBA) has increased its dividend each year for over 40 years in a row. The stock also has a current dividend yield of 3.4%, which is significantly above the ~2% average dividend yield in the S&P 500 Index. This makes Walgreens one of the best dividend stocks to buy in May.
Walgreens has hit a rough patch lately, due to a difficult environment for brick-and-mortar retailers. But the company is working its way back to growth. In the meantime, the stock is attractively valued, with a high dividend yield and a long history of dividend growth.
Business Overview
Walgreens Boots Alliance is a large pharmacy retailer, with over 18,500 stores in 11 countries around the world. It also operates one of the largest global pharmaceutical wholesale and distribution networks in the world, with more than 390 centers that deliver to nearly 230,000 pharmacies, doctors, health centers and hospitals each year.
Business conditions are challenged for Walgreens right now. In early April, Walgreens reported (4/2/19) disappointing quarterly results. Revenue of $34.5 billion increased 4.6% year-over-year, but missed analyst expectations by $40 million. Adjusted EPS of $1.64 also missed, coming in significantly below the $1.72 consensus forecast. Adjusted EPS declined 5.4% for the quarter, based on the same quarter the year before.
Walgreens attributed the weak quarterly results to significant reimbursement pressure, generic deflation, and weakening overall market conditions in the U.S. and the U.K. Equally concerning, Walgreens reduced its full-year outlook. The company now expects adjusted EPS to be roughly flat in 2019, from previous expectations of 7% to 12% EPS growth. 2019 will be a year of heightened investments in its stores and major growth initiatives, which explains why the company no longer expects EPS growth this year.
Growth Prospects
Despite its weak fiscal second quarter, Walgreens has a positive long-term growth outlook. This is because pharmacy retail has so far proven to be highly resistant to e-commerce competition. Even in a difficult period, Walgreens grew its retail pharmacy sales by 7.3% last quarter. Prescriptions and pharmacy retail will benefit from the aging U.S. population and corresponding need for more healthcare services. In addition, the company is launching a cost management program that targets $1.5 billion in annual savings to help boost EPS growth starting in 2020.
Even though online retailers like Amazon (NASDAQ:AMZN) continue to pose a threat to brick-and-mortar retailers, Walgreens retains significant competitive advantages. This is important, as many retailers without competitive advantages will be put out of business if they cannot compete with Amazon. For Walgreens, its major competitive advantage is its leading pharmacy market share. Its strong brand and thousands of stores have created name recognition with consumers.
Plus, Walgreens is a trusted name in the pharmacy space, which has natural defenses against e-commerce retailers. When people are ill, they will often go to a Walgreens store to purchase medication and speak with a pharmacist. This is the value that Walgreens provides consumers relative to an Internet-based retailer like Amazon.
Walgreens is also very recession-resistant. Consumers are unlikely to cut spending on prescriptions and other healthcare products. Walgreens’ adjusted earnings-per-share declined by just 7% during 2009 – the worst of the global financial crisis – and the company actually grew its adjusted earnings-per-share from 2007 through 2010, following this up with over 20% earnings growth in 2011. The ability of Walgreens to navigate recessions is an important consideration for investors, particularly those who expect an economic slowdown in the years ahead.
Dividend & Valuation Analysis
Perhaps the most attractive aspect of Walgreens as a potential stock investment, is the company’s dividend and history of dividend growth. Walgreens currently pays an annual dividend of $1.76 per share, equaling a hefty 3.4% dividend yield based on the recent share price of ~$52. Walgreens is also a dividend growth stock, with over 40 years of annual dividend hikes, including a 10% increase in 2018. With a dividend payout ratio of just 29% in 2018, Walgreens is very likely to increase its dividend again in 2019.
Walgreens is also a cheap stock on a valuation basis. Based on the company’s revised guidance, Walgreens is expected to generate earnings-per-share of $6.02 in fiscal 2019. The stock has a price-to-earnings ratio of 8.7x. This is a fairly low valuation for a company of Walgreens’ brand strength and profitability. Walgreens stock could easily deserve a higher valuation multiple. For example, a P/E ratio of 13x would still be a modest valuation for Walgreens, but would still generate significant returns.
In addition, the stock has a 3.4% dividend yield, with the potential for EPS growth to add even more to shareholder returns. Overall, Walgreens stock could easily generate total returns well above 10% per year over the next several years.
Final Thoughts
Walgreens has had a tough year. Financial results have missed expectations, and the stock has underperformed the broader S&P 500 Index by a considerable margin. The company is struggling to adapt to an era of online retail.
However, Walgreens should continue to see strong demand, as its pharmacy business still has a value for consumers. With a strong balance sheet and significant cash flow generation, Walgreens could pursue an acquisition to boost growth.
In the meantime, Walgreens stock is cheap, with an attractive dividend yield of 3.4% that pays investors well to be patient. Walgreens is an undervalued Dividend Aristocrat.