Editor’s note: This column is part of InvestorPlace.com’s Best Stocks for 2021 contest. Ben Reynolds’ pick for the contest is Walgreens Boots Alliance (NASDAQ:WBA).
Walgreens Boots Alliance (NASDAQ:WBA) is a global pharmacy-led health enterprise, and WBA stock is one of the best to buy for 2021.
Overall, Walgreens is a large and storied enterprise. It is one of the two largest companies in its industry, the other being CVS Health (NYSE:CVS). It was founded in 1901 and now has more than 21,000 stores in 11 countries. When you include equity investments, Walgreens has a presence in more than 25 countries.
Additionally, WBA stock has a $34 billion market capitalization and Walgreens generates $139.5 billion in annual revenue. And the company has increased its dividend for 45 consecutive years, making it a Dividend Aristocrat.
Walgreens Stock Is Undervalued
Walgreens has a long history of success and a shareholder-friendly corporate culture of dividend increases.
Despite this, the company is trading for a low price-earnings (P/E) ratio of just 8.2 times expected fiscal 2021 adjusted earnings per share (EPS) of $4.98.
For comparison, Walgreens has traded with an average P/E ratio of around 15 over the last decade.
If Walgreens were to return to a P/E ratio of 15 over the next year, the company’s stock would surge 83% without additional growth. Even a return to a more reasonable yyy ratio of 12 would result in 46% returns.
Additionally, another way to gauge valuation is by comparing a stock’s current dividend yield to its historical average dividend yield.
Walgreens stock’s average dividend yield over the last decade is 2.4%. The company’s stock currently has a high 4.7% dividend yield. Walgreens stock has rarely traded for a yield over 3% during the last 30 years — and hasn’t ever traded for a 4% or higher yield prior to recently over the last 30 years.
So, if Walgreens stock were to return to its historical average dividend yield, the stock price would rise by about 90%. Thus, Walgreens is significantly undervalued when compared to its historical averages.
Competitive Advantage & Safety
A company can’t increase its dividend every year for 45 consecutive years without a durable competitive advantage. For Walgreens, that competitive advantage is a mix of its convenient and widespread retail locations — which tend to be at the corner of high traffic roads and its status as a well-known brand.
Collectively, Walgreens provides an essential service: the filling of prescriptions. And people are unlikely to significantly cut spending on prescriptions and over the counter healthcare products, even during economic downturns.
As a result, Walgreens is recession-resistant. This company saw adjusted EPS decline just 7% in 2009 — the worst year of The Great Recession.
However, the company hasn’t fared quite so well during the current novel coronavirus induced economic downturn. In fact, Walgreens adjusted EPS declined year-over-year, despite sales rising 2% YOY.
Nonetheless, while Walgreens’ performance during COVID-19 has been lackluster, it’s important to remember that the company continues to generate strong cash flows and is expecting low single digit growth in adjusted EPS in fiscal 2021. The company generated operating cash flow of $5.5 billion and free cash flow of $4.1 billion in fiscal 2020 against dividend payments of $1.7 billion.
The company’s dividend remains safe even during this difficult operating environment. And with a 45-year streak of consecutive dividend increases, it’s very likely that Walgreens’ management continues to increase dividends in the year ahead.
Growth Prospects & Final Thoughts
Despite recent setbacks, Walgreens has a positive long-term growth outlook.
The company’s retail pharmacy has proven to be resistant to e-commerce, and will benefit from an aging U.S. population and resulting demand increases for healthcare services.
In Walgreens’ most recent quarter, sales growth was led by a 3.6% increase in the Retail Pharmacy USA segment and a 4.3% increase in the Pharmaceutical Wholesale division.
Moreover, new partnerships and growing e-commerce revenue are also growth catalysts. In fact, Walgreens and DoorDash (NYSE:DASH) recently announced an on-demand delivery collaboration. And, the company’s Walgreens.com sales and Boots.com sales grew 39% and 155%, respectively, in the company’s fiscal fourth quarter versus the same quarter a year ago.
As a whole, the biggest catalyst for Walgreens is a “return to normal” from current COVID-19 conditions. When this occurs, the company’s valuation multiple is likely to see expansion resulting in solid returns for shareholders. In the mean time, though, shareholders get “paid to wait” from the company’s high 4.7% dividend yield.
On the date of publication, Ben Reynolds was long WBA stock.
Ben Reynolds founded Sure Dividend in 2014. Today, Ben continues to run Sure Dividend to help individual investors build high quality income portfolios. Ben graduated Summa Cum Laude from University of Houston with a finance degree. His work through Sure Dividend has appeared on Forbes, Fidelity, Motley Fool, The Street, Yahoo! Finance and more.