A Drug Retailer for Your Portfolio

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I recently wrote about Walgreen's (NYS: WAG) strong performance in its last fiscal quarter. The drug retailer bumped up its quarterly dividend, but its decision to split up with pharmacy-benefits manager Express Scripts (NAS: ESRX) proved to be a dampener, since that deal had contributed around $5.3 billion in annual revenues.

Let's delve a little deeper into Walgreen's fundamentals after this news and see whether it deserves a place in your portfolio.

Income matters
Walgreen's five-year compounded revenue growth stands at 9.2%, whereas in the past 12 months, revenues have risen by 7.3%. Sales for drug retailers all around were sluggish last year and the beginning of this year, as the economy slowly recovered from the recession and discretionary spending took a hit.

But in the last quarter, Walgreen's sales picked up, thanks to higher prescription sales coupled with higher store traffic. Same-store sales went up by 4.1% in the last quarter. That's a testament to some strong underlying fundamentals.

To boost sales, Walgreen opened 41 new stores in the last quarter and is looking to open more as the year rolls on. It currently has 7,715 drugstores in the United States. Walgreen also recently acquired drugstore.com, which should bring with it nearly 3 million customers and 60,000 online-ready products.

In the past five years, despite adverse economic conditions, Walgreen has managed to retain its overall levels of profitability. Its LTM operating margin stands at 5.6%, compared with 5.7% back in 2006.

Stability
From a balance-sheet standpoint, Walgreen's total debt stands at $2.39 billion, basically flat with a year ago. Its debt-to-equity ratio stands at 16.3%.

In the past 12 months, its unlevered free cash flow has gone up 29% to $2.83 billion. Its current ratio stands at 1.6, which means it is well placed to pay off any short-term obligations. And an interest coverage ratio at 50.6 implies that it has no real issues in servicing its debt requirements.

Value
Let's see how the company is valued compared with its industry peers.

Company

Trailing P/E

Forward P/E

TEV/FCF

Walgreen15.413.010.7
CVS Caremark (NYS: CVS) 14.811.515.5
Rite Aid (NYS: RAD) NMNM84.4
Wal-Mart (NYS: WMT) 11.610.819.3
Kroger (NYS: KR) 13.611.419.1

Source: Yahoo! Finance. NM = not meaningful.

Walgreen has been performing reasonably well so far and has a strong balance sheet. Compared with its peers, Walgreen is reasonably priced when you consider that it has good growth potential.

Walgreen is a cash-generating machine, and it's looking to return as much of that cash to its shareholders as it can. It's raising its quarterly dividend to $0.225 per share from the earlier $0.175. That equates to a current dividend yield of 2.3%. The company also recently announced plans to buy back $2 billion worth of its shares after completing an earlier $1 billion authorization. These are good indications, signaling management's faith in the company's growth story.

The Foolish bottom line
Walgreen has been performing well and has strong earnings and cash to back up its growing operations. It is reasonably priced and looks like a good buy going forward. Plus, the dividend increase and share buyback are always a welcome sign. Investors should take note and may want to consider adding Walgreen to their portfolios.

At the time this article was published Fool contributor Shubh Datta doesn't own any shares in the companies mentioned above. The Motley Fool owns shares of Wal-Mart. Motley Fool newsletter services have recommended buying shares of and creating a diagonal call position in Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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