Tuesday, June 9, 2015

Walgreens Boots Alliance, Inc. (WBA) Dividend Stock Analysis

Linked here is a detailed quantitative analysis of Walgreens Boots Alliance, Inc. (WBA). Below are some highlights from the above linked analysis:

Company Description: Walgreens Boots Alliance, Inc. is the largest U.S. retail drug chain in terms of revenues, this company operates more than 8,000 drug stores throughout the U.S. and Puerto Rico.

Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these 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

WBA is trading at a premium to all four valuations above. However, when also considering the NPV MMA Differential, the stock is trading at a 31.8% discount to its calculated fair value of $123.01. WBA earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%

WBA earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. WBA earned a Star for having an acceptable score in at least two of the four Key Metrics measured.

Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2005-2008, 2006-2009, 2007-2010, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1933 and has increased its dividend payments for 40 consecutive years.

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) or Treasury bond? 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

WBA earned a Star in this section for its NPV MMA Diff. of the $2,032. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as WBA has. If WBA grows its dividend at 15.0% per year, it will take 4 years to equal a MMA yielding an estimated 20-year average rate of 2.47%. WBA earned a check for the Key Metric 'Years to >MMA' since its 4 years is less than the 5 year target.

Peers: The company's peer group includes: CVS Caremark Corporation (CVS) with a 1.4% yield, Rite Aid Corp. (RAD) with a 0.0% yield and Wal-Mart Stores Inc. (WMT) with a 2.6% yield.

Conclusion: WBA earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks WBA as a 5-Star Very Strong stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $150.58 before WBA's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 40 years of consecutive dividend increases. At that price the stock would yield 0.9%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 9.7%. This dividend growth rate is well below the 15.0% used in this analysis, thus providing a margin of safety. WBA has a risk rating of 1.50 which classifies it as a Low risk stock.

With over 8,000 drugstores, WBA offers unmatched convenience with one of the the most recognized brand names in the retail pharmacy business. The company enjoys a strong market share within the relatively stable U.S. retail drug industry. Competitors such as Wal-Mart and CVS continue to put pressure on WBA's market share. The stock is trading well below my $123.01 calculated fair value. However, its yield of around 1.6% is below my current minimum. For now, I will continue to watch for a more favorable time to buy.

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 held no position in WBA (0.0% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.

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1 comment:

  1. Hi,

    I checked this stock and I do see few issues, that I do not like with this stock:
    1. Price to Free Cash Flow (TTM) at 23,96
    2. Diluted number of share increased
    3. Free Cash Payout TTM above 5 year average
    4. Cash Return on Capital below 15% and below 5 year average
    5. Last year dividend growth slower than 4 year average


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