Streetwise for Sunday, October 15, 2017

Will Amazon Damage Walgreens (WBA)?

I would like to open today’s column with a heartfelt word of thanks to everyone who voted for “Happy Returns,” the Rudd International sponsored entry in the Southeastern Guide Dogs Superheroes on Parade, Puppy Edition, competition.

Happy Returns entered the winner’s circle as the winner among 37 entries in the Sarasota area. At a dollar per vote, Happy Returns received 8,249 votes.

While there is no denying that it was a pleasure to see Happy Returns take first place, the real winners were the superhero dogs that are bred, raised and trained at Southeastern. Those dogs will transform the lives of not only the visually impaired but also veterans living with PTSD and/or a variety of other battlefield injuries.

Sincere thanks also go out to artist Scott Moore, the creator of the puppy statues, and to Lou Pak for designing and painting Happy Returns. Now back to our regular programming.

On September 19, Walgreens (WBA) announced it received final approval for the acquisition of over 1,900 Rite Aid stores. The acquisition should result in significant revenue growth opportunities, as well as cost synergies. The deal is expected to be immediately accretive to company’s earnings.

Meanwhile, the company’s share price performance has been dismal. One key reason is Amazon. Amazon is said to be exploring entering the pharmacy space and any company potentially at risk from Amazon can look forward to having its share price pounded to oblivion.

Although the health care supply chain and regulatory environment are highly complex, Amazon has the necessary resources and required long-term outlook. Or, Amazon could acquire a pharmacy chain in the same manner it acquired Whole Foods to enter the grocery business.

While Amazon could certainly make home delivery more convenient, it is questionable whether Amazon’s usual strategy of increasing demand, or influencing consumer selection of products via its pricing strategy, will work in an online pharmacy environment.

Since October 2015, Walgreens’ shares have trailed the performance of the S&P 500 index by 50 percent, which leaves it looking undervalued against the market. The stock is also selling at trailing P/E ratio of 17.84 and forward price to earnings ratio of 12.72.

Walgreens is a Dividend Aristocrat and has continuously raised its dividend since 1976, sporting a 20 percent and 13 percent compounded annual growth rate (CAGR)over the past ten and five years, respectively.

Moreover, the dividend yield is at its highest level since 2013, yielding more than it did during the financial crisis: For fiscal 2017, the indicated dividend is $1.60, or 2.19 percent.

So why should you be interested? One key reason is that dividend income in a diversified portfolio of dividend paying stocks is incredibly stable over the years.

Earnings, while more volatile, also tend to be relatively consistent. Profitable firms tend to become more profitable over time. Again, this is particularly true in a diversified dividend paying portfolio.

Stock prices, on the other hand, do not share this constant rise characteristic. Instead, share prices often fall victim to expectations that are too robust or too pessimistic. As such, there can be wider swings, particularly over a short-term period.

Walgreens is an excellent example. Its share price has increased by 43 percent, 49 percent, 55 percent and 33 percent at various times in the past 15 years. During that same 15-year period, there were times when the shares declined by 19 percent, 13 percent, 17 percent, 35 percent and 15 percent. Yet, not once did earnings decline by that amount in any given year and dividends never declined.

The lesson here is to never get overly enamored with or distressed by short-term fluctuations of stock prices. By its nature, market volatility has little regard for underlying corporate value. It is the realization of this fact that will enable you to ignore what amounts to the mostly random daily noise on Wall Street.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.