Walgreens and its stock has been one of the dogs of the Dow Jones for over the past year, and people have yet to see promising times ahead for this fledgling retail pharmacy company. Walgreens stock has dropped 26.11% in the past year, compared to the S&P 500’s falling 1.13% over that same time. It is also down 34.11% YTD, with S&P 500 only being down 10.65% over the same period. Walgreens hit a six-year low at $38.02 yesterday, May 13. What has gone wrong with Walgreens, and furthermore, is their stock even worth investing in given how cheap it is today?
Trusted Since 1901…Where is the trust today?
There are many issues that Walgreens is currently dealing with, from both the pharmacy and retail parts of its business. The company reported, in their last quarter’s earnings, a net income of $946 million, or $1.07 per share, down from $1.16 billion, or $1.24 per share last year. The pharmacy retailer had been on track to maintain its guidance for the full fiscal year, but now uncertainty has prompted the company to hold off on providing guidance until the next earnings report. This, to many investors, leaves their distinction of 44 years of continued dividend growth in jeopardy.
There were a number of reasons for this decline, with only some of them being COVID-19 related. When looking at the pharmacy (which is over 75% of its business), Walgreens is under pressure from both giant companies like Amazon, Walmart, and Costco, who can offer lower pricing on some medications and the convenience of fast home delivery. There are also a greater number of low-cost generic options available today. Insurers are also squeezing them, offering lower reimbursements on prescriptions filled. Finally, as COVID-19 appears to be not going away anytime soon, you should continue to see a reduction in visits to doctors’ offices, leading to reduced demand for non-chronic prescriptions dispensed at retail pharmacies. Also, during this pandemic, people who do go out shopping, can do their grocery shopping at Costco and Walmart and pick up their medications in one trip. Finally, Walgreens seems to be putting out a lot of strategic initiatives geared towards their retail operations, while closing 160 walk-in clinics in late November of last year.
When looking at the retail operations of Walgreens, there are a number of challenges they are facing, with only some of them brought on by COVID-19. First, there is continued pressure in its UK business, due to stiff competition from discount retailers and online retailers. Another cause for the declines is the emergence of e-commerce. With many products, including drugstore staples such as shampoo and vitamins, available online in a couple clicks and fast delivery often offered for free, the convenience factor that has advantaged Walgreens for decades is no longer nearly as valuable. After a surge in demand earlier in March, the footfall has declined significantly both in and outside of the U.S due to stay-in-place orders, which have just recently been eased up. After the Coronavirus hit, people bought their staple goods in bulk from large retailers like Amazon, Costco, Walmart, which led to less foot traffic. Also, more and more people shopped online when they were shut in their homes. With quick delivery speed, this was a safer option than to have to leave the house to buy them and risk getting infected.
So as an investor, there are enough concerns regarding Walgreens and the problems it faces as a retail pharmacy to warrant the decline of its stock in the market. People are looking for convenience, and are questioning the need to get their prescription medications at a pharmacy when they can shop at one place to get them while getting their groceries and staple goods. And, on some medications, at a cheaper price. Plus, a lot of people were already shopping from homes before COVID 19, and the pandemic will more than likely raise these numbers. People who want to buy Walgreens as cheaply as it has been in 6 years might want to wait and see how the virus continues to play out. They may want to find another stock that appears to have more upside and will make quicker gains.
Walgreens is looking to cut in excess of 1.8 billion dollars by 2022. This is not a poorly managed company. They moved out of our last recession very well. In my mind, these cost cuts should give Walgreens a competitive edge when all is said and done. Let’s take a look at what Walgreens is doing right and perhaps why their bearish outlook may be undeserved. Today may be a great time to buy stock in Walgreens. It’s attractive for investors who value the strength of blue chip stocks, love backing superbly managed companies, want a stock in a company with a long history of distributing growing dividends, and have the patience to buy into something that will grow slow, but should rise to new highs over the next three to five years.
Walgreens…Finding their way back to the corner of Happy and Healthy
So, you may be asking yourself, from what I’ve read so far about Walgreens in this article, where is the upside to this stock. A couple of major ones come to mind. First, Pharmacies are recession proof. There will always be a consistent demand for prescription medications, and not only is this roughly three quarters of Walgreens business, but with it comes the foot traffic to keep the retail sales flowing. To this point, Walgreens recently put out this announcement, “As we deal with significant demands on our stores and pharmacies during this time, we’re looking to fill roughly 9,500 existing full- and part-time roles in stores across the U.S”. So while people will always need scripts filled, An aging population should increase demand for pharmaceuticals in the years ahead as well
Keep in mind, Walgreens has been around since 1901. They’ve dealt with it all. Keep in mind, with stores located within five miles of 75% of Americans, and a competitive home delivery option, Walgreens is one of the largest Retail Pharmacies and providers of medical and wellness products in the United States and the World. At the close of our country’s last recession, Walgreens stock had risen higher than where it was when it began. I see a similar scenario repeating itself as we eventually come out of COVID 19. And here are some reasons why.
First and foremost, recently the White House enlisted Walgreens and CVS Pharmacies to expand on their capacities to provide coronavirus testing through their drive thru operations, Walgreens responded establishing 23 drive through Covid 19 testing sites in 15 states. The expanded COVID-19 testing program should result in higher visits to its store, generating more revenue as people will also pick up prescription medications, discretionary and staple goods while there. On top of this, LabCorp will also begin to offer antibody testing at more than 100 Walgreens’ patient service center locations where it provides testing. Finally, with most states loosening up their stay-at-home orders, in-store foot traffic is bound to pick up in both its pharmacy and retail operations.
What’s more intriguing about the byproduct of the Coronavirus pandemic and its effects on Walgreens will be when a vaccination is made and ready for distribution. The current timeline on this is by the middle of 2021. When it becomes available, Walgreens will be inundated with customers. And I’m sure management has strategically mapped out how the 1.8 Billion yearly cost cuts yearly by 2022 will be used to handle this massive influx in business. What I do know is that Walgreens has some of the most knowledgeable and highly trained pharmacists and technicians in the industry. People will have questions, and trust that Walgreens pharmacy staff and walk in clinics will answer them thoroughly and knowledgeably. What should also aid Walgreens when the vaccination hits the market is how they’re using their cost cuts to improve the retail side of the store. Walgreens formed a partnership with Jenny Craig towards the end of 2019. I see a huge upside here. I believe that the surge in health and wellness, on top of weight loss post Covid 19 will be mammouth, and I believe Walgreens will reap the benefits of their partnership greatly.
On the pharmacy side, Walgreens is making advances to keep up with its competition. One is a partnership with German healthcare company McKesson to create a joint venture for the European market. Walgreens also partnered with supermarket chain Kroger to put pharmacies in their grocery chain. The company also has a plan to create VillageMD primary care clinics in some stores. It’s part of an effort to give customers experiences and services they can’t get online to drive more traffic. Finally, Walgreens is also trying to emulate Amazon and other online retailers by boosting its delivery capabilities. The company is testing a drone delivery service, becoming the first retailer in the country to do so. Given that an estimated 7% of the population lives within five miles of Walgreens, this would significantly speed up delivery times. It’s still testing and may be a few years off, but it shows where they are headed.
Finally, Walgreens is trading its ex-dividend on Tuesday the 19th, which will be paid on the 12th of June. Dividends are an important source of income to many shareholders. Walgreens dividend is covered by both profit and cash flow. Walgreens earnings per share have been growing at 14% year over year for the past five years. Also, in the last 10 years, Walgreens has lifted its dividend by 13% a year on average. They are a Dividend Aristocrat, in fact, increasing its dividend for 44 consecutive years. Most importantly is that the company’s dividend payout is practically double the average S&P 500 dividend payout.
Final Thoughts: Is Walgreens a stock to buy today for the value investor?
To answer that, you have to ask yourself is now a good time to buy, or do you wait until its price drops lower. The way the market has acted this week, you may decide to wait. Walgreens is down over 8% the last five days of trading. There seems to be some trepidation from investors regarding the numbers for unemployment and fears that the country is taking down COVID-19 restrictions too soon. Keep in mind, though, that over the past couple of months, there has been a lot of volatility on Wall Street. Any little bit of promising news sends the stock market flying, with stocks making nice sized comebacks after big drops. If you decide to wait, you could be missing out on the perfect time to buy.
As a value investor, I’m all in on Walgreens before the 19th of May. While the bears on Wall Street have been hammering the company down to new lows, keep in mind that Walgreens has been growing earnings at an impressive rate, and has a very low payout rate, meaning that it is reinvesting heavily in its business, which is what astute investors want to see in a stock. Zoom Video Communications and Teladoc Health are examples of companies who have flourished from the onset due to the effects COVID-19 have had on our life as we once knew it. Walgreens, on the other hand, will slowly see growth in numbers as more and more Americans return back to work and are asked to be tested for the virus. And when a vaccine becomes approved and available on the market, I see Walgreens stock knocking it out of the park. And we’re not talking about the flu shot…people are going to be racing to their local pharmacy to get vaccinated. By this time, huge efforts in cost cutting that Walgreens had been making will have been strategically reinvested wisely to greet this influx of foot traffic and profit off of it. It may take you two to three years to see nice gains on an investment in Walgreens stock, but for those who have patience, well dang ain’t those prices looking real good right about now.
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