Stock Analysis: Walgreen Co (WAG)

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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