Dividends4Life: Stock Analysis: Walgreen Co (WAG)

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Stock Analysis: Walgreen Co (WAG)

Posted by D4L | Monday, August 25, 2008 | , | 4 comments »

This article originally appeared on The DIV-Net August 18, 2008.

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) and was long in WMT (1.6% of my Income Portfolio).

What are your thoughts on WAG?

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  1. MG (moneygardener) // August 25, 2008 at 10:26 AM

    At $17.27 WAG would sport a P/E ratio of about 8x earnings. What a steal!!! Absolutely never going to happen.

    It sounds like this stock would never fit into your method of stock analysis. Growth must not be accounted for, for low dividend stocks.

  2. Anonymous // August 25, 2008 at 12:46 PM

    MG: I think WAG is a compelling investment for capital appreciation, but doesn't work in my dividend/income investing framework.

    My model does consider dividend growth. It is designed to use conservative estimates. For WAG my model calculates a 11.9% dividend growth rate, but with a 1.21% yield (at the time of the analysis) it wasn't enough.

    Running the numbers through my D4L-PreScreen.xls model and back-solving for the needed growth rate to yield a $3,000 NPV MMA Differential WAG, the needed growth rate I get 19.3%. This is similar to some of the other low-yielding stocks that I have looked at (ALF & LOW).

    Again, I am not saying WAG is a bad investment, but it quantitatively does not meet my criteria as a dividend stock. Of coarse, everything is dependent on my underlying assumptions.

    Best Wishes,

  3. Anonymous // August 25, 2008 at 12:50 PM

    MG: Sorry, ALF above should be AFL (AFLAC). Doing too much during lunh. :)


  4. MG (moneygardener) // August 25, 2008 at 3:26 PM

    makes sense...

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