Friday, July 9, 2010

Walgreen Stock Analysis

Walgreen Co is the nation's largest drugstore chain with fiscal 2008 sales of $59 billion. The company operates 6,902 drugstores in all 50 states, the District of Columbia and Puerto Rico. The company is member of the S&P 500 and was a recent addition to the S&P Dividend Aristocrats index.

Walgreen Co has paid dividends for more than 76 years and consistently increased payments to common shareholders every year for 34 years.
Over the past decade this dividend
stock has delivered a negative annual average total return of 1.10% to its shareholders. The stock is trading at the same levels it was changing hands a decade ago.

The company has managed to deliver an 11.50% average annual increase in its EPS between 1999 and 2008. Earnings per share are expected to increase to $2.14 in FY 2010, and $2.49 by FY 2011.

The Return on Equity has decreased over the past decade from 20.10% in 2000 to 14.70% in 2009. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Annual dividends have increased by an average of 14.70 % annually since 2000, which is higher than the growth in EPS. The reason for this is that earnings per share hit a temporary setback in 2009. Once EPS resumes its upward trend, dividend growth should almost equal it over time.

A 15 % growth in dividends translates into the dividend payment doubling every five years. If we look at historical data, going as far back as 1972, Walgreen Co has actually managed to double its dividend payment every six years on average.

The dividend payout ratio has increased from a low of 13.60% in 2004 to 23.80% in 2009. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings. The low payout has enabled Walgreen to spend more on growing its business. As its markets become saturated I expect the company to increase its payout over time.

Currently Walgreen Co is trading at 13.10 times earnings and yields 2.10%. While the price earnings multiple and the dividend payout are attractive, the dividend yield is below my 2.50% entry criteria. By utilizing my dividend grouping strategy however I plan on initiating a partial position in this retailer as long as it yields 2%.

Full Disclosure: None

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