Walgreens Boots Alliance (NASDAQ:WBA) is a global pharmacy retailer and WBA stock is one of the best to buy for 2021.
This company’s stock has generated total returns of nearly 39% in 2021. This is significantly ahead of the SPDR S&P 500 ETF (NYSEARCA:SPY), which had total returns of 6.3% so far this year.
While Walgreens stock has appreciated significantly in the first quarter of 2021, there is still significant upside ahead for WBA stock.
Walgreens Stock Still Appears Undervalued
Walgreens’ peak adjusted earnings-per-share came in at $5.99 in fiscal 2019. The company generated adjusted earnings-per-share of $4.74 in fiscal 2020. We expect adjusted earnings-per-share of $4.90 in fiscal 2021.
The company’s stock is currently trading for a price-to-earnings ratio of just 10.6 using our fiscal 2021 earnings estimate. For context, the company’s historical average price-to-earnings ratio over the last decade is around 15.
A price-to-earnings ratio of under 11 seems too low for a shareholder-friendly company like Walgreens. Walgreens has increased its dividend payments for 45 consecutive years.
And future dividend growth is likely. The company’s payout ratio is just 38% using expected fiscal 2021 earnings. That low payout ratio gives management room to increase the dividend even if earnings growth is stagnant.
If Walgreens were to return to its historical average price-to-earnings ratio of 15, this would imply a share price of $73.50 using expected 2021 fiscal adjusted earnings-per-share of $4.90. That’s 41% upside from current prices.
Walgreens’ Total Return Prospects
Walgreens stock currently has an above-average dividend yield of 3.6%. This yield — coupled with a low payout ratio and likely dividend increases — should appeal to income-hungry investors in or near retirement. It’s more than double the S&P 500’s current yield of a paltry 1.5%.
From fiscal 2011 through fiscal 2020, Walgreens managed to compound its adjusted earnings-per-share at 6.7% per year. The company has proven it can grow over a wide range of economic environments as evidenced by its 45 year streak of consecutive dividend increases.
We expect the company to turn around from recent earnings-per-share declines and return to moderate growth. We expect earnings-per-share growth of 5% per year going forward for Walgreens.
With 5% expected growth coupled with a 3.6% dividend yield, Walgreens offers investors expected returns of 8.6% annually before valuation multiple changes.
A very conservative estimate of Walgreens’ fair value is to use a price-to-earnings ratio of around 10 or 11, which would imply the company is trading at fair value now.
But, if the company’s stock again reaches its historical average price-to-earnings ratio of around 15 in the next 5 years, shareholders will see much stronger returns. Returning to a price-to-earnings ratio of 15 — which isn’t high by any stretch of the imagination — would boost returns by ~7% annually.
This pegs Walgreens’s expected total annual returns at somewhere around 8.5% to 15.5% over the next five years.
Walgreens offers investors relatively high expected total returns over the next five years because it is still trading for a relatively low price-to-earnings ratio and high dividend yield.
Additionally, the company has a fairly low payout ratio to go along with a long history of dividend increases. This gives the company’s stock an appealing risk to reward profile.
Walgreens stock should especially appeal to investors looking for safe dividends, an above average yield and a high likelihood of continued dividend increases ahead.
The company’s stock has certainly appreciated so far this year, but that has only brought the stock from being significantly undervalued to being either fairly valued (conservatively) or still somewhat undervalued.
We believe there’s still room for Walgreens to continue its solid start to fiscal 2021. The company now has momentum on its side as well. Walgreens has generated the highest price returns year-to-date of any Dow 30 stock.
On the date of publication, Ben Reynolds was long WBA stock.
Ben Reynolds founded Sure Dividend in 2014. Today, Ben continues to run Sure Dividend to help individual investors build high quality income portfolios. Ben graduated Summa Cum Laude from University of Houston with a finance degree. His work through Sure Dividend has appeared on Forbes, Fidelity, Motley Fool, The Street, Yahoo! Finance and more.