Income-oriented investors, especially those that need the dividend income to finance their retirement, should primarily focus on what we call Blue Chips – companies that are established, that pay dividends regularly, and where the risks are not very high.

These Blue Chip stocks can form a solid base for any dividend-oriented portfolio, and we regularly update our list of Blue Chip stocks.

In this article, we will take a closer look at Walgreens Boots Alliance (WBA), which is among the top-rated dividend-paying Blue Chip stocks right now, and which has, we believe, a good chance of not only delivering safe and rising dividends, but also strong total returns over the next couple of years.

Company Overview

Walgreens Boots Alliance is a pharmacy-centered healthcare company that operates three segments: Retail Pharmacy USA, Retail Pharmacy International, and Pharmaceutical Wholesale. The company sells both prescription drugs as well as retail products such as health and beauty products to its customers through more than 18,000 retail stores, with about half of those stores being located in the US. Walgreens is active in the United Kingdom, Mexico, Chile, Thailand, and several other countries on top of that.

Walgreens was founded more than 100 years ago, in 1901, and is headquartered in Deerfield, Illinois. The company is currently trading with a market capitalization of $49 billion, following a steep share price decline over the last year.

Walgreens Should Be Able To Grow Its Profits Going Forward

Walgreens’ share price has gotten under pressure primarily due to the market worrying about the company’s growth trajectory, as some investors fear that competition from online pharmacies and more regulation in the healthcare industry could pressure the margins of pharmacy companies such as Walgreens.

It is, we believe, not likely that Walgreens will stop growing its earnings-per-share, though, due to several reasons: First, company-wide revenues continue to grow, and this should remain the case in the future as well. Aging populations in the US and elsewhere mean that healthcare expenditures will continue to rise, and pharmacies will reap some of the additional revenues. During the last couple of quarters Walgreens’ margins got under pressure due to lower reimbursement spending, but the company plans to tackle this headwind by reducing its expenses. Walgreens states that the company is on track to deliver cost savings of $1.5 billion by 2022, which should positively impact Walgreens’ margins.

Last but not least, Walgreens has reduced its share count very meaningfully in the past. Even if the company-wide net profits would not rise meaningfully, Walgreens could still deliver attractive earnings-per-share growth thanks to its share repurchases. Especially as long as the valuation remains as low as it is today, Walgreens’ stock buybacks will have a large positive impact on the company’s earnings-per-share growth rate.

Low Valuation Results In Strong Total Return Potential

Walgreens trades at just $54 right now, which is equal to a price to earnings ratio of just 9, based on forecasted profits for the current year. This is the lowest valuation shares have traded at in recent years, and we see considerable upside potential for Walgreens’ stock. Our fair value estimate is a 13 times price to earnings multiple, which means that multiple expansion alone could result in share price gains of more than 7% annually throughout the next five years.

When we factor in our forecast for earnings-per-share growth of 6% and Walgreens’ dividend yield of 3.4%, Walgreens has a high forecasted total return of roughly 17% annually through 2024.

Takeaway

 Walgreens’ stock has been punished unfairly hard, as we believe that it is not likely that Walgreens’ profits will stagnate or even decline in the long run. This results in an attractive buying opportunity for investors that are interested in safe and growing dividends and strong total returns of as much as 17% annually from this pharmacy company.