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Why Walgreens Is a Top Dow Stock for 2019

Why Walgreens Is a Top Dow Stock for 2019
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Wednesday, 22 May 2019 05:20 PM Current | Bio | Archive

The Dividend Aristocrats, which have increased their dividends for 25+ consecutive years, are highly regarded as the best dividend growth stocks in the market. But even Dividend Aristocrats can fall on hard times.

Walgreens Boots Alliance (WBA) has increased its dividend for over 40 years in a row, but this year has been unusually difficult for this Dividend Aristocrat. Walgreens stock has declined 23% so far in 2019, making it one of the worst-performing stocks in the Dow Jones Industrial Average this year.

The company is working through a turnaround that is likely to be successful. And it is well-positioned to capitalize on a major growth trend in the United States. For these reasons, this Dow stock could produce strong returns over the next several years.

Retail Downturn Hits Walgreens

Walgreens is the leading pharmacy retailer in the U.S. and Europe. It has over 18,000 stores in 11 countries. It is also a major global pharmaceutical wholesaler and distributor.

The difficult position Walgreens finds itself in is due largely to a poor quarterly earnings report. Walgreens reported disappointing first-quarter results. Revenue of $34.5 billion increased 5% year-over-year, but missed analyst expectations by $40 million. Even worse, adjusted earnings per share declined 5% from the year-ago period. EPS of $1.64 came in significantly below the $1.72 expected by analysts.

Walgreens attributed the poor quarterly results to weak reimbursements and worsening generic deflation. For these reasons, Walgreens also cut its forecast for the remainder of the year. Earnings per share are now expected to be flat, a major reduction from the 7% to 12% growth the company had previously expected.

It appears Walgreens has been caught in the broader difficulties facing the retail industry. Those with heavy physical store exposure have been undercut by online competitors offering consumers convenience and often, lower prices. Walgreens was insulated from this for a time, but investors are clearly worried about the looming entry of Amazon (AMZN) into the pharmacy retail space. Amazon acquired online prescription provider PillPack for nearly $1 billion, widely seen as a precursor to a bigger move into the healthcare industry.

That said, Walgreens remains a dominant brand, and its physical stores continue to provide value to consumers. 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 resulting increase in demand for healthcare products and services. Healthcare spending is expected to rise at a 5.5% annual rate in the U.S. over the next decade, and Walgreens’ thousands of stores will service this demand.

Buy This Beaten-Down Dividend Aristocrat

Walgreens is a highly appealing stock due to its dividend growth and attractive valuation. Walgreens currently yields 3.4% and the company has increased its dividend for over 40 years in a row. Walgreens is also a cheap stock on a valuation basis. Walgreens stock has a price-to-earnings ratio of just 8.7x, well below reasonable fair value for an industry-leading company. A valuation multiple closer to 13x would still be a reasonable valuation for Walgreens, and would increase shareholder returns by over 8% per year from a rising share price.

Walgreens stock has significantly underperformed the broader market index this year, but times like these are often the best opportunities to invest in high-quality dividend stocks. Investors with a long-term focus should be drawn to Walgreens’ low stock valuation and its hefty dividend.

The 3.4% dividend yield and expected earnings per share growth of 6%, combined with a higher P/E ratio, could lead to excellent total returns above 17% per year. As a result, Walgreens is a top Dow stock to buy today.

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.

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BenReynolds
The Dividend Aristocrats, which have increased their dividends for 25+ consecutive years, are highly regarded as the best dividend growth stocks in the market. But even Dividend Aristocrats can fall on hard times.
walgreens, top, dow, stock
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2019-20-22
Wednesday, 22 May 2019 05:20 PM
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