Walgreens Boots Alliance Turnaround Drives Results
Walgreens Boots Alliance (NASDAQ: WBA) has been an attractive deep value and high-yielding stock for us because of its turnaround story. Divestitures, a new CEO, and a multi-year cost-saving plan are the pillars of that story and the combination is paying off. The company says it's achieved $2 billion in annual cost savings a full year ahead of schedule and driving strong results on the bottom line. Cash flow and free cash flow for the year are up significantly versus the previous year as well and should continue to grow in the coming year too. What this means for investors is an increasingly safe 4% dividend yield and a positive outlook for dividend growth.
Walgreens Boots Alliance Has A Good Quarter
Walgreens Boots Alliance had a great quarter despite the divestiture of the Alliance Health unit last year. The company produced $34.26 in net consolidated revenue which is only down 1.4% versus last year. More importantly, the revenue beat the consensus estimate by 260 basis points and revenue from continuing operations is up 12.8%. Comps in the US are up 8.1% with an even stronger 8.9% showing in the pharmacy section. Pharmacy sales are boosted by COVID vaccinations as well as at-home COVID tests and increased purchases of flu and cold medicine.
Moving down the report, the company reported a 10 basis point contraction in the adjusted gross margin. The adjusted gross margin came in at 21.7% but 90 basis points better-than-expected. On the bottom line, the GAAP earnings of $0.41 grew 6.4% over last year but missed the consensus by $0.42. The caveat for investors is that these figures may not be comparable due to 1-time costs and the impact of divestiture. On an adjusted basis, the EPS of $1.17 is up 29% and beat the consensus estimate by $0.15
As for cash and cash flow, the company says cash flow for the year topped $5.60 billion with just over 75% of that as free cash flow. That's up triple digits from the previous year and a very positive sign of the strategy’s success.
High-Yield Walgreens Boots Alliance Is A Value
Walgreens Boots Alliance is among the highest-yielding and lowest valued stocks in the S&P 500. Trading at only 10x its earnings, it's valued at less than half the cost of the average S&P 500 stock and its 4% yield is nearly 300 basis points better. The caveat is that Walgreens Boots Alliance does carry a fair amount of debt and has been overshadowed by poor operations in the past but it appears the company is exiting those dark times. In our view, with free cash flow so improved, we expect to see the company raise the dividend for a seventh year at the end of the next fiscal year and possibly by a larger amount than the 5% average.
The technical Outlook: Walgreens Boots Alliance Pulls Back To Support
Shares of Walgreens Boots Alliance are down more than 3.5% in the wake of the Fiscal Q4 earnings report. Price action is falling down towards the $45 level where we would expect to see a bounce. The question is whether or not the market will step in and support prices at this level or if the price action will fall down to a new low. We view the stock as a buy but the market may not agree with us. A move below $45 could take it all the way down to $40 but there is no guarantee for that.
Longer-term, the turnaround story, the cash flow, the value, and the dividend make this stock attractive for dividend growth portfolios so we expect to see price action move back up to the recent highs if not higher. The Pricetargets.com consensus target of $53.80 is just shy of those levels and implies more than 18% of upside for the stock. In our view, this could be the beginning of a long and sustained rally in shares of WBA.
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