Two Dividend Aristocrats To Watch In 2021

Source: StockRover*

Despite the reduced margins, management has still been able to raise its dividend by 2.2% in 2020 Q2. Gross margins and operating margins have been declining steadily in the past decade taking a toll on the company’s earnings. 

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Source: Morningstar/ValueofStocks

As Walgreens Boots battles the shrinking margins, management has put in place a series of changes aimed at improving operations. Both in Walgreens and Boots. Management has defined a transformational cost program for both its operations in the U.S. and Europe. Optimizing operations and increasing efficiency, will allow the company to increase margins.

Source: Investor Presentation

Management estimates to deliver over $2 billion in annual cost savings by the end of 2022. The pandemic uncovered some of the biggest flaws in some businesses. For Walgreens, it was a wake-up call as to the under-investment in their digital sales. Management has stated their intention of continuing to invest in the e-commerce channel.

Source: Walgreen Boots Q1 FY 2021 Presentation

Source: Walgreen Boots Q1 FY 2021 Presentation

Alliance Healthcare Deal

As management implements these operational changes, it has also decided to divest some of its holdings. Namely Alliance Healthcare, Walgreens’ distribution business in Europe. After a potential deal to acquire AmerisourceBergen (NYSE: ABC) in 2018 of which it owns roughly 28% Walgreens is AmericsourceBergen’s biggest customer, and that has led both companies to explore possibly combining operations in the past. 

Both companies have agreed on the Alliance Healthcare divestment, from which Walgreens Boots will receive $6.75 billion. This will include $6.275 billion in cash and 2 million AmerisourceBergen shares boosting Walgreens Boots’ stake in the company from 28% to 29%. Given the attractive multiple of roughly 12X FY20 adjusted EBITDA, Walgreens Boots’ management seems to have made a good deal. The expected impact on earnings per share is -$0.02. The proceeds from the sale will be directed toward healthcare investments and to reduce the hefty debt load.

Competition for Walgreens Boots

CVS Health Corporation (NYSE: CVS) has been Walgreens’ biggest competitor in the past. Both companies have fiercely fought for market share. Combined they had more than 50% of the drug prescription market share. Rite Aid Corporation (NYSE: RAD) is a much smaller competitor, the number of its locations is roughly 25% of CVS or Walgreens. Besides Rite Aid, supermarket chains with their own pharmacies also compete in the space. Walmart (NYSE: WMT) and Kroger (NYSE: KR) also have a considerable percentage of the prescription drug market share estimated at around 7.8%, according to data from 2019. 

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Disclosure: Value of Stocks holds no positions in the stocks mentioned. You can read his  more

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