Are colas for sale at Walgreens
Purchase: Walgreens Boots Alliance
After the roller coaster ride continues with my last share purchase CVS Health, I've now picked out another falling knife to take courageously into: CVS competitor Walgreens Boots Alliance I've been on the watchlist for a long time. After yesterday's general price slump, I finally got hold of what was supposed to be a bargain price.
Like CVS, Walgreens is one of the major US drug and pharmacy chains. You can find a branch of the two in the USA at every street intersection, and in addition to Aspirin and Voltaren you can also get cola, ice cream or cornflakes there, the two chains also serve as local suppliers in many areas.
CVS has greatly expanded its business model in recent years, however, the drugstores are only one mainstay, and vertical integration is now being sought, from health insurers to dormitory operators to dialysis providers. Walgreens is rather conservative in this regard, the core business is still the branches. Unlike CVS, Walgreens is not only active in the USA, but also has hundreds of branches under the Boots brand internationally, mainly in the UK and China. The UK business only accounts for a small part of sales, so the upcoming Brexit chaos will not leave Walgreens indifferent, but it will not threaten the existence of the core business.
Today a king
This business has been very profitable for decades, which is why the dividend has been increased annually for over 40 years. Walgreens is thus a so-called dividend aristocrat, and even on the verge of being accepted into the illustrious circle of the divide kings. The dividend yield is now over three percent (not least because of the lower price). Since Walgreens pays out less than a third of its profits, there is enough room for a continuous dividend payment and increase even with stagnant growth.
But why is the Walgreens price chart looking so disastrous? While there are very solid reasons for the current crash at CVS - you had to write off a lot of money on the acquisition of the dormitory operator Omincare, and the recent takeover of the insurer Aetna also entails not entirely insignificant risks - the price decline at Walgreens is not quite as understandable. Business is actually going well. The second quarter of this year was mixed (and led to a nearly thirteen percent drop in price), but the subsequent Q3 exceeded analysts' expectations for sales and earnings.
Is there something of Amazon?
However, the “elephant in the room” is Amazon's entry into the market for both companies. The e-commerce giant is pushing its way into the healthcare business: some time ago Amazon took over the pill mail order company PillPack and founded the health startup "Haven" together with Berkshire Hathaway. So far this has not had any relevant impact on the business of CVS and Walgreens, but pessimists fear that Amazon will rage here in a similar way to the book trade and sweep all existing providers off the market. I definitely see a danger here, but the pharmaceutical retail business is not quite as easy as selling books, there are already quite a few hurdles to be overcome in terms of compliance and regulation, and both CVS and Walgreens have a few trump cards in them of the hand.
The big picture
At least as important for the course of Walgreens, however, is the development of the overall market. I haven't bought any new shares for over a year and a half (apart from the ETF savings plan) because the valuations, especially in the USA, have been way too hot for me overall, and a major market-wide slump in share prices is bound to come at some point. Especially where, thanks to the impending no-deal Brexit, Trump's simmering trade war with China and the EU and the crisis in the Gulf, the global economic situation is becoming more and more gloomy.
The fact that I have now accessed Walgreens is mainly due to the fact that Walgreens had already had its crash behind it. The share price has almost halved since the highs of 2015 and is at a historically rather low level in terms of PER and other valuation parameters. Unfortunately, this is no guarantee against another crash, because experience has shown that hardly any company is spared once the market starts to slide. My hope is that in this case at least the dividend will remain stable, as Walgreens did in the last financial crisis.
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