Tags: Walgreen | WAG | ESRX | MHS

Walgreen a Good Defensive Play

By    |   Friday, 19 Aug 2011 11:59 AM

The United States appears headed for a sustained period of low economic growth, if not a double-dip recession. Walgreen (WAG), the country’s largest pharmacy chain, represents the kind of defensive stock that should hold up well in tough economic times.

It’s not as if people will stop buying the drugs and personal healthcare products sold by Walgreen. The company also offers an attractive dividend yield, 2.6 percent recently. The 10-year Treasury note just dipped under 2 percent in comparison.

Walgreen is working hard to provide low-priced goods for cash-strapped consumers. It recently announced plans to launch its Nice store brand early next year — more than 400 grocery and household products at discount prices.

Walgreen will price Nice items at levels as much as 30 percent below other national brands. Nice products will replace the company’s current store brands.

But Walgreen does face some headwinds. One is Express Scripts’ (ESRX) recent agreement to buy Medco Health Solutions (MHS) for $29.1 billion, which would merge the country’s two biggest pharmacy benefit managers.

Walgreen and Express Scripts are engaged in a contract dispute. If regulators approve Express Scripts’ takeover of Medco, that would certainly add leverage to the benefit manager’s position.

Pharmacy benefit managers play a key role in directing business to whichever retailers with which they ally. Direct mail businesses also allow the managers to compete head-on with drugstores like Walgreen.

Strong earnings

None of this hurt the company in the quarter ended May 31. Its profit soared 30 percent, to $603 million from $463 million a year earlier. Revenue climbed 6.8 percent to $18.4 billion.

Most analysts are bullish, with 16 of 27 tracked by Thomson/First Call rating Walgreen shares a buy or strong buy.

Joseph Agnese of Standard & Poor’s gives Walgreen a five-star buy rating. “We believe the company is well positioned to benefit as it accelerates international square footage growth both internally and through acquisitions,” he writes.

That foreign growth should help push Walgreen’s revenue up 5.4 percent in the year ending Jan. 31, Agnese says. Walgreen next reports around Sept. 21.

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The United States appears headed for a sustained period of low economic growth, if not a double-dip recession. Walgreen (WAG), the country s largest pharmacy chain, represents the kind of defensive stock that should hold up well in tough economic times. It s not as if...
Walgreen,WAG,ESRX,MHS
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2011-59-19
Friday, 19 Aug 2011 11:59 AM
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