By Charan Singh
Many well-established businesses reward shareholders by returning some or even most of the profits to the owners in the form of cash dividends. Walgreens (WAG) is a mature retail and pharmacy business on the upswing recently, about to pay another quarterly dividend and giving investors a good entry into the stock.
Before we get to that let’s consider some reasons to own a dividend-paying stock like WAG. Apart from the obvious that you get paid to wait, dividend stocks usually have higher demand than stocks without a dividend and are especially sought after when the markets are more turbulent. This helps support the stock price during market slides compared to non-dividend paying stocks. Furthermore, as a dividend-paying stock drops in price, the dividend yield goes up making the stock even more attractive to investors.
Recently several stocks including WAG dropped enough in price per share that their dividend yield crossed 4%. This tended to be close to the bottom in stock price as investors started buying stocks with that attractive yield. In our current economic environment, when the Treasury yields are ultra-low, a 3-4% dividend yield on a relatively safe stock like WAG can look even better.
Now let's look at the dividend itself. Walgreens (WAG) declared a dividend of $0.275 per share on June 19th, 2012, which will be payable to stock owners on record as of Aug. 15th. The actual dividend payment will be made on Sept. 12th even if the stock owner sold the position after Aug. 15th. This dividend represents a 22% hike from $0.225 per share dividend paid on June 12th. With a recent closing price of $35.80 per share, this is a dividend yield of 3.07%.
WAG’s fundamentals have improved recently, coinciding with its increased dividend payout. This combination makes WAG a great investment for the rest of the year and well into 2013.
First, the company recently expanded its international footprint by acquiring pharmacy chain, Alliance Boots in Europe. This acquisition created the single largest trans-Atlantic pharmacy chain. Although the stock price usually goes down in the short term after an acquisition, if the acquisition brings in enough value over the long term the stock may be nicely rewarded. WAG stock took a beating last month on the news initially for the high price tag of the acquisition and the suspect timing of buying assets in Europe of all places during a crisis.
Second, Walgreens settled its biggest domestic over hang; the 14-month long dispute with the biggest U.S. Pharmacy benefit manager (PBM), Express Scripts (ESRX). This settlement, announced in July, means that ESRX customers can once again take their prescriptions to Walgreens pharmacies. We’ll have to watch WAG same store sales numbers to see if customers are actually coming back, but the news is certainly very good long term and the stock has already bounced up aggressively in the last two weeks.
With an improving fundamental story and another dividend about to be paid, WAG appears to be giving investors a good opportunity for entry. The stock should be able to rise into the low 40’s where it was before the dispute with ESRX broke out publicly last summer. I currently have an Out Of The Money Covered Call position to take advantage of the upcoming dividend. I am also creating an additional return by selling calls against my stock.
Charan P. Singh has been a coach with OptionsANIMAL since 2009 and has been involved with the company in other capacities, including as a student, since 2006. He is a professional trader and has nine years of equity and seven years of option trading experience.