Walgreen: The Drug Empire Strikes Back

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As cost containment increasingly becomes the name of the game in health care, Walgreen (WAG) is determined to dominate the drug retailing business through aggressive expansion of its global empire, making WAG stock a solid long-term growth investment on secular healthcare trends.

Tough new rules from the federal government and health care providers are putting relentless downward pressure on drug prices; only a behemoth such as Walgreen can effectively strike back.

Walgreen Has Made Smart Moves

Walgreen (NYSE:WAG)Walgreen operates the largest chain of drug stores in the United States, with roughly 8,000 locations in all 50 states, the District of Columbia and Puerto Rico.

Not content with its already imposing presence, Walgreen is expanding and enjoying lower overhead — and more leverage with pharmaceutical companies and health care providers — through strategic acquisitions in the U.S. and other countries such as the U.K.

Economic recovery (albeit an uneven one) combined with an aging population and expansion of drug coverage under Obamacare will be a boon for Walgreen. The company is capitalizing on its large network to boost operating margins through economies of scale, despite the harsh cost strictures of managed care that are lowering what it can charge for drugs.

Roughly two-thirds of Walgreen’s sales are prescription drugs. The remainder derives from merchandise, cosmetics, over-the-counter medications, and groceries. Walgreen is currently pursuing a merchandising plan to create “all-in-one” stores that generate greater sales volumes, lower overhead costs and a more appealing in-store experience. For example, sections of the store devoted to cosmetics and beauty aids also provide in-store professional manicures and pedicures.

This sort of specialized, onsite service results in loyal, repeat customers who develop an affinity with the Walgreen brand.

The company’s all-in-one remodeling campaign is transforming the drug store retailing industry, as copycats belatedly get on the band wagon. The company also provides drug management programs for patients that require assistance with complicated prescriptions. The latter is a growth area in the drug treatment space.

WAG Stock Performance

With more than $2 billion in cash on its balance sheet, Walgreen has an ample war chest to enhance its domination of the retail drug chain industry. In recent years, the company has purchased Duane Reade, Drugstore.com, USA Drug, and Alliance Boots, among other chains. Walgreen is absorbing these acquisitions, squeezing out the fat and generating substantial synergies by placing all of these familiar brand names under a single, integrated operating structure.

Walgreen’s most recent operating results justify its strategy. For the fourth quarter of fiscal 2014, Walgreen’s adjusted net earnings were $714 million — a 2% increase from $702 million in the same quarter a year ago. Adjusted earnings per share (EPS) for the quarter increased 1% to 74 cents

Fourth-quarter sales increased 6% compared with the year-ago quarter to $19.1 billion; sales for fiscal 2014 increased 6% to a record $76.4 billion. Adjusted EPS for the full fiscal year increased 5% to $3.28.

With a current dividend yield of 2.2%, Walgreen also has racked up one of the best records among the “S&P Dividend Aristocrats,” defined as companies that have hiked their dividends every year for at least 25 years. This stock is a prescription for growth and income investors alike.

As of this writing, John Persinos did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/10/walgreen-wag-stock/.

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