As part of my process, I tend to screen the list of dividend growth stocks regularly, in order to identify companies for further research. I also skim company press releases for announcements related to earnings and dividends. I was able to identify two dividend growth stocks, which seem to have been punished excessively as of recently. Those companies include Walgreen and CVS.
Walgreens Boots Alliance, Inc. (WBA) operates as a pharmacy-led health and wellbeing company. It operates through three segments: Retail Pharmacy USA, Retail Pharmacy International, and Pharmaceutical Wholesale. The company is a dividend champion, which has managed to raise dividends to shareholders for 42 years in a row. The ten year dividend growth rate is 17.80%/year. Walgreens Boots Alliance has managed to grow earnings per share from $2.03 in 2007 to $3.82 in 2016. Forward estimates are for $5/share in 2017. Currently, the stock is attractively valued at 18.30 times earnings and yields 2.30%. Check my analysis of Walgreens for more information about the company.
CVS Health Corporation (CVS) provides integrated pharmacy health care services. It operates through Pharmacy Services and Retail/LTC segments. The company is a dividend achiever, which has managed to boost its dividend for 14 years in a row. The ten year dividend growth rate is 27%/year. CVS Health has managed to grow earnings per share from $1.90 in 2007 to $4.90 in 2016. Forward estimates are for $5.88/share in 2017. Currently, the stock is attractively valued at 15.20 times earnings and yields 2.70. Check my analysis of CVS Health for more information about the company.
Both companies are down on fears that Amazon will take over the business of selling prescription pharmaceuticals, and take it online. I find the whole Amazonification fears overblown, and believe that they are a product of Amazon.com’s rising stock price. Most pundits are seeing the rising stock price, and try to sound intelligent explaining this phenomenon. They go further by projecting the strength indefinitely. Real life doesn’t work in a linear fashion of course.
This was the case in 2015, when pundits were excited about Chipotle’s food when the stock price was high. They were biased against McDonald’s because the price had stagnated.
I believe that these fears are offering a good opportunity for me to take a second look at these companies. Both companies fit my requirements for good valuation, a streak of annual dividend increases, dividend safety and earnings growth. Competition is never good for profits, especially if your competitor has deep pockets. But I do not believe that the business for Walgreen’s or CVS can be easily disrupted, even by a newcomer such as Amazon. Of course, I am biased from a personal experience, but my family always viewed the pharmacy as a place to refill prescriptions and obtain some feedback from the pharmacist. I believe that there is also some sense of loyalty in customers, who prefer to go to a neighboring location for their needs. I also how easy it would be to transport pharmaceuticals across state borders.
In the case of CVS, we also have a moat of it being a pharmacy benefit manager. Last but not least, the market for prescriptions will likely increase over time, and I believe that at least one of those two players will continue to have a dominant position in it (they both have today). I believe these two companies that have stood the test of time will do well in the long-term.
If I had to choose between the two, I would choose CVS Health only because of better entry valuation. I also own much more in Walgreen than CVS. If I were building a position from scratch, I would probably initiate a position in both, after analyzing them and deciding for myself that they are good buys today of course. I would then add to my position over time.
Relevant Articles:
- How to become a successful dividend investor
- How to value dividend stocks
- Does Market Capitalization Matter in dividend investing?
- CVS Health: A High Dividend Growth Machine to Consider
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