08-06-2014, 12:08 PM
(This post was last modified: 08-06-2014, 12:15 PM by Dividend Watcher.)
Interesting how this is working out. I've trimmed WAG several times in wife's and my portfolio but we are standing pat right now. I've been watching management's actions a lot over the last few years since the spat with Express Scripts started and, to me, management has been shrewd with their strategic moves.
They didn't get all they wanted for reimbursement rates with ESRX but I believe they got some concessions. Since I'm not privy to the details, I'll have to take management's word that the deal that was struck was acceptable. It hurt them a little at the time but they've since recovered at least some of the lost sales.
Then the Alliance Boots acquisition. That seemed like a logical expansionary move to me. At the time, WAG had over 8,000 retail locations with all of it located in the U.S. Didn't seem to me that they had room to expand much more in the U.S. without lowering profit margins by moving into less populated or lower income areas. Alliance Boots gave them a presence in the European market along with access to AB's proprietary health & beauty product lineup including perfumes and makeup which appeared to have acceptance in the EU market. It makes sense to me that they only took a 40% stake at the time with an option for the rest. This gave them access to the internal workings of AB & the EU market without buying the whole operation outright and then finding out they couldn't make it work to their advantage. With the latest announcement that they are accelerating the 2nd part of the deal, it seems to me that management believes AB will be accretive on favorable terms.
The AmerisourceBergan deal appears to have given them access to and certainty in pricing for at least a portion of their prescription drug and health & beauty supplies. I don't think WAG would have concluded that deal unless the terms were acceptable. Part of the reason for the deal may have also been to ameliorate some of the concessions in the ESRX spat, and given ABC's expertise in pharmaceutical management, may give WAG some flexibility (and maybe some savings) on managing their own network of retail stores.
The announcement of a 7% increase in the dividend plus the $15b acceleration of the AB deal signals to me that WAG is positioning itself for growth in the future. I'm sure the next few years won't be easy as they do the integration, cuts costs by their goal of $1b, implement a $3b buyback program and still maintain their dividend growth. Using their estimates of $4.25-$4.60 earnings in FY16 (FY ends in August), gives a P/E of only 13.5 at the midpoint using today's price which seems very reasonable to me. I'm willing to hold. Our cost basis is in the $30-31 range.
As to the inversion, management has stated that they did not structure the two-part takeover deal with that in mind in the first place. The advisors they used recommended against it and, since I'm not a corporate tax attorney, I'm liable to agree with them. Even if they did go through with it, the time and expense of WAG wending through the process with no certainty going into it would distract them from their primary business which, as announced, seems to be a pretty big hurdle already.
WAG's announcement about all this is at the IR website. There's a lot of talk on the street and I suppose the drop is due to many large institutions betting on the inversion and a reaction to the daunting tasks ahead.
Would I buy here? Probably not only because the initial yield is so low and the time frame I'm looking at. For someone with a longer time frame, this may be the time to start a position if you can be patient although the current P/E is around 20. Maybe waiting for a further dip would be prudent.
They didn't get all they wanted for reimbursement rates with ESRX but I believe they got some concessions. Since I'm not privy to the details, I'll have to take management's word that the deal that was struck was acceptable. It hurt them a little at the time but they've since recovered at least some of the lost sales.
Then the Alliance Boots acquisition. That seemed like a logical expansionary move to me. At the time, WAG had over 8,000 retail locations with all of it located in the U.S. Didn't seem to me that they had room to expand much more in the U.S. without lowering profit margins by moving into less populated or lower income areas. Alliance Boots gave them a presence in the European market along with access to AB's proprietary health & beauty product lineup including perfumes and makeup which appeared to have acceptance in the EU market. It makes sense to me that they only took a 40% stake at the time with an option for the rest. This gave them access to the internal workings of AB & the EU market without buying the whole operation outright and then finding out they couldn't make it work to their advantage. With the latest announcement that they are accelerating the 2nd part of the deal, it seems to me that management believes AB will be accretive on favorable terms.
The AmerisourceBergan deal appears to have given them access to and certainty in pricing for at least a portion of their prescription drug and health & beauty supplies. I don't think WAG would have concluded that deal unless the terms were acceptable. Part of the reason for the deal may have also been to ameliorate some of the concessions in the ESRX spat, and given ABC's expertise in pharmaceutical management, may give WAG some flexibility (and maybe some savings) on managing their own network of retail stores.
The announcement of a 7% increase in the dividend plus the $15b acceleration of the AB deal signals to me that WAG is positioning itself for growth in the future. I'm sure the next few years won't be easy as they do the integration, cuts costs by their goal of $1b, implement a $3b buyback program and still maintain their dividend growth. Using their estimates of $4.25-$4.60 earnings in FY16 (FY ends in August), gives a P/E of only 13.5 at the midpoint using today's price which seems very reasonable to me. I'm willing to hold. Our cost basis is in the $30-31 range.
As to the inversion, management has stated that they did not structure the two-part takeover deal with that in mind in the first place. The advisors they used recommended against it and, since I'm not a corporate tax attorney, I'm liable to agree with them. Even if they did go through with it, the time and expense of WAG wending through the process with no certainty going into it would distract them from their primary business which, as announced, seems to be a pretty big hurdle already.
WAG's announcement about all this is at the IR website. There's a lot of talk on the street and I suppose the drop is due to many large institutions betting on the inversion and a reaction to the daunting tasks ahead.
Would I buy here? Probably not only because the initial yield is so low and the time frame I'm looking at. For someone with a longer time frame, this may be the time to start a position if you can be patient although the current P/E is around 20. Maybe waiting for a further dip would be prudent.
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“While the dividend itself is merely a rearrangement of equity, over time it's more like owning an apple tree. The tree grows the apples back again and again and again, and the theoretical value of the tree doesn't change just because of when the apples are about to fall.” - earthtodan
“While the dividend itself is merely a rearrangement of equity, over time it's more like owning an apple tree. The tree grows the apples back again and again and again, and the theoretical value of the tree doesn't change just because of when the apples are about to fall.” - earthtodan