Monday, August 18, 2008

Stock Analysis: Walgreen Co (WAG)

Linked here is a PDF copy of my detailed analysis of Walgreen Co (WAG) (alt.1, alt.2). Below are some highlights from the above linked analysis:

Company Description: Walgreen Co is the largest U.S. retail drug chain in terms of revenues. It sells prescription and non-prescription drugs, beauty care, personal care, household items, candy, photofinishing, greeting cards, seasonal items and convenience foods.

Fair Value: I consider 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. If I exclude the high and low valuation and average the remaining two, WAG is trading at a 31.1% discount. WAG earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
  1. Rolling 4-yr Div. > 15%
  2. Dividend Growth Rate
  3. Years of Div. Growth
  4. 1-Yr. > 5-Yr Growth
  5. Payout 15% of avg.
WAG earned two Stars in this section for 3.) and 4.) above. WAG has paid a cash dividend to shareholders every year since 1933 and has increased its dividend payments for 33 consecutive years. It's one year dividend growth rate exceeded its 5-year growth rate. This could indicate the growth rate is accelerating.

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)? 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 no Stars in this section, and had one Star deducted for a negative NPV MMA Diff. The negative NPV MMA Diff. means that on a NPV basis for every $1,000 invested in WAG you would earn $3,175 less than a MMA earning a 20-year average rate of 4.61%. If WAG grows its dividend at 11.9% per year, it will never equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 4.61%.

Other: WAG is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. WAG should benefit from increased generic drug sales, new Medicare legislation, new store growth and an aging U.S. population. Potential threats would include the growth of non-traditional competitors, such as Wal-Mart (WMT), et. al., and potential legislation changes.

Conclusion: WAG earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and lost one Star in the Dividend Income vs. MMA section for a net total of two Stars. This quantitatively ranks WAG as a 2 Star-Weak stock.

Using my D4L-PreScreen.xls model, I determined the share price would have to drop to $17.27 before WAG's NPV MMA Diff. increases to the $3,000 NPV MMA Diff. I like to see. At that price WAG would yield 2.41%. As a value investment WAG could possibly have merit. However, as a dividend investment WAG comes up short at this time.

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 had no position in WAG (0.0% of my Income Portfolio).

What are your thoughts on WAG?


Recent Stock Analyses:
This article was written by Dividends4Life. You may email questions or comments to me at bbkjbbkj@gmail.com.

5 comments:

  1. Nice analysis. Just like you I think that the yield is pathetic. Even if you bought 10 years ago, your yield on cost would still be pathetic. I do realize that the dividends and earnings are growing rapidly so this one could be a nice addition to your portfolio for capital gains. But then what happens if the growth stops and you are sitting at not capital gains and have a pathetic dividend growing fast but not fast enough for you to afford to pay your monthly bills.
    Next :-)

    ReplyDelete
  2. I really like WAG. Although the dividend is small, the growth rate is awesome. They are in a great spot to benefit from demographics and higher fuel costs.

    Growth in the share price will be great over time. Also, once their store expansion slows they could easily decide to hike the pay out ratio so that the yield comes in line with Wal-Mart.

    ReplyDelete
  3. MG,

    I am all for buying fast growing dividend stocks. The positives are that your dividend is doubling every 3-4 years or so. The stock price could double every 4 years or so as well..
    Negatives:
    untill the perceptions shift, the stock price starts trading in a range or even worse ,falls off a cliff and the dividend keeps increasing but still gives a low yield.

    BTW this is what happened to WMT in early 2000's.

    ReplyDelete
  4. A great investment for the long term. Well-managed, no debt, sweet spot of demographics, convenience aspect is going to become more important as people age and fuel becomes more costly. Growth rates in earnings have been amazing (13%+). Even if the EPS growth rate slows to 10% or so, the stock is still well worth owning at these levels. If the stock trades in a range then it progressively gets cheaper as earnings rise, great chance to buy more and more. This will hold true with any stock that trades in a range and continues to grow earnings. P/E contraction is not much of a threat below about 16x. These headwinds combined with the industry position and company history make this company a great investment IMO.

    Perhaps not considered a dividend investment per se, but nevertheless over time this stock will increase in value nicely. The dividend will continue to grow at likely better rates than the earnings grow.

    ReplyDelete
  5. MG,

    You almost made me buy some WAG after your posts. Too bad my next dividend investment is not due untill end of september.
    I do agree that the stock trades at an attractive P/E.

    Best Regards,

    ReplyDelete

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