Walgreen (WAG), the leading retail pharmacy chain in the U.S., recently increased its quarterly dividend by 28.6%, the largest dividend increase in the company's 110-year history, from 17.5 cents a share to 22.5 cents a share. This, in addition to Walgreen's new $2 billion stock repurchase program, marks a strong commitment to rewarding its shareholders.
While we are generally fans of any company committed to returning cash to shareholders, we wonder if doling out cash at this juncture could jeopardize the company's growth opportunities -- and in turn, hurt shareholders in the long run.
We value Walgreen at $43.73 Trefis price estimate of its stock - about 9% ahead of its current market price.
Walgreen's Growth Strategy Requires Investment
Walgreen seems to have embarked on a more capital-intensive retail-focused growth strategy while liquidating its assets in pharmacy benefit management services. (See Walgreen's Rationale for Selling its Benefits Business and CVS Sees Value in Pharmacy Benefits Business While Walgreens Is Selling.)
Its recent acquisition of Drugstore.com further highlights its game plan of focusing on the retail pharmacy business through its 7,600 brick-and-mortar stores and online presence. To further grow in that arena, it will need to expand its product assortment within groceries and non-pharmacy products, as well as increase its number of retail stores, both of which require heavy investments.
Replacing Express Scripts Revenue via Acquisition or Expansion
Walgreen recently announced that it would stop filling prescriptions for customers covered by Express Scripts in January 2012 after its contract renewal negotiations failed on the grounds of uncompetitive reimbursement rates offered by the pharmacy benefits manager.
Walgreen expected to fill around 90 million prescriptions processed by Express Scripts in 2011, making up over $5 billion or over 7% of Walgreen's sales so clearly this move impacts Walgreen's business. (SeeExpress Scripts' Split Could Weigh on Walgreen Shares.)
This further warrants increased investments in its retail business -- either opening new stores or acquiring other smaller regional players to compensate for the loss of revenues from Express Scripts. In either case, we believe it would help for Walgreen to have more cash on hand, making this larger dividend a questionable strategy.
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