Two Dividend Aristocrats To Watch In 2021

Recently Amazon (Nasdaq: AMZN) has also ventured into the pharmacy business. Allying its excellence in customer satisfaction and distribution expertise, to take a bite of both CVS and Walgreens market share. The announcement pushed the stock prices of the largest pharmacy chains down.

  WBA CVS RAD
Market Cap $41.318 B $95.825 B $1.196 B
US Locations 9 277 9 967 2 464
Price/Earnings N/A 12.11 N/A
Forward Price/Earnings 9.8 9.81 65.79
Price/Book 2.06 1.39 1.96
Price/Sales 0.3 0.36 0.05
Price/Cash Flow 7.43 6.44 18.02
Debt to Equity 2.03 1.27 10.47
Net Margin % -0.49% 2.99% -1.66%
Return on Equity % -3.19% 12.10% -48.84%
Dividend 3.94% 2.70% N/A
Payout Ratio 381.73% 33.06% N/A

Risks for Walgreens Boots

Among the biggest risks Walgreen Boots faces is the hefty debt load. At over 2.0X times its equity. With over $40 billion in debt, the company will have to reduce it in order to improve its financial performance. The Alliance Health deal should help management deleverage the balance sheet. Another concern regarding Walgreens Boots is the fact that due to the poor financial results, which is a consequence of the pandemic, the payout ratio has skyrocketed to over 380%. This should be a short-term result of the operational impact spurred from the lockdowns. The payout ratio should return to levels of around 40% allowing management to reward shareholders and still have capital to deploy.

Final Thoughts on Walgreens Boots

Walgreens Boots is a recession proof company, offering a solid dividend of about 3.7%. Despite the operational challenges presented by the pandemic, the company was still able to generate over $4 billion of FCF. In 2020 the company was able to generate $4.90 of FCF/share. Once the company recovers the operational performance it has achieved in the past, we can expect earnings over $4 per share. In line with its forward price-to-earnings under 10.

In the short term the company might face some difficulties as the management puts its transformational changes in place. But the stock is bound to return to higher levels. As management reduces debt, the stock price should reflect the healthier balance sheet. Even during uncertain times, Walgreens Boots business won’t dramatically change. The investment thesis for Walgreens Boots is focusing on the long-term prospects of the company, which were not materially affected despite the deterioration of operations in the past and the high competition it will face in the future.

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

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