WAG?!?

[TomK]

Does this morning's 14% drop feel like a major over-reaction to everyone else too, or is it just me? I'm tempted to grab some shares (or maybe even a small long call position) on this major dip. It is not like the company's performance is deteriorating. They simply announced they would not be doing an inversion. Was this much of their share price REALLY based on the presumption that they'd be avoiding a lot of taxes in the future as a result of the inversion?

I haven't dusted off the fundamentals for WAG In a while. Not too excited about just a 2.2% yield, but on other metrics, isn't WAG doing pretty well?

And, by the way, haven't inverting companies been getting bashed left and right? Shouldn't WAG be applauded for this?

[earthtodan]

Looks like the 14% drop brought WAG's forward P/E right in line with that of CVS. I've wondered why WAG was valued so much higher, and I guess that was the answer. Still, I'm a buyer of CVS.

[EricL]

They also announced a 7% dividend increase and guided for an expected payout ratio target of 30-35%, which is higher than what they've been paying in recent years.

[Roadmap2Retire]

(08-06-2014, 08:41 AM)TomK Wrote: Does this morning's 14% drop feel like a major over-reaction to everyone else too, or is it just me? I'm tempted to grab some shares (or maybe even a small long call position) on this major dip. It is not like the company's performance is deteriorating. They simply announced they would not be doing an inversion. Was this much of their share price REALLY based on the presumption that they'd be avoiding a lot of taxes in the future as a result of the inversion?

I haven't dusted off the fundamentals for WAG In a while. Not too excited about just a 2.2% yield, but on other metrics, isn't WAG doing pretty well?

And, by the way, haven't inverting companies been getting bashed left and right? Shouldn't WAG be applauded for this?

I had a look at WAG a while ago and thought it was overvalued and decided not to initiate a position. I'll have to take a closer look at it now again. They have a great track record for the 5-yr and 10-yr divi growth rates.

[TomK]

(08-06-2014, 09:12 AM)EricL Wrote: They also announced a 7% dividend increase and guided for an expected payout ratio target of 30-35%, which is higher than what they've been paying in recent years.

(08-06-2014, 09:25 AM)Roadmap2Retire Wrote: I had a look at WAG a while ago and thought it was overvalued and decided not to initiate a position. I'll have to take a closer look at it now again. They have a great track record for the 5-yr and 10-yr divi growth rates.

By my math (annual look), this raise is about 10.5%. Not bad at all by objective measures, but definitely below their five year average, which is closer to 20%. The 35% payout ratio target is also notable. And worrisome? The payout ratio right now looks to be in the low to mid 40s. Does that spell much lower dividend growth in coming years? Unless earnings are really going to improve, maybe with the full Boots acquisition?

[Roadmap2Retire]

(08-06-2014, 09:33 AM)TomK Wrote:

(08-06-2014, 09:12 AM)EricL Wrote: They also announced a 7% dividend increase and guided for an expected payout ratio target of 30-35%, which is higher than what they've been paying in recent years.

(08-06-2014, 09:25 AM)Roadmap2Retire Wrote: I had a look at WAG a while ago and thought it was overvalued and decided not to initiate a position. I'll have to take a closer look at it now again. They have a great track record for the 5-yr and 10-yr divi growth rates.

By my math (annual look), this raise is about 10.5%. Not bad at all by objective measures, but definitely below their five year average, which is closer to 20%. The 35% payout ratio target is also notable. And worrisome? The payout ratio right now looks to be in the low to mid 40s. Does that spell much lower dividend growth in coming years? Unless earnings are really going to improve, maybe with the full Boots acquisition?

Hmmm thats a very good point. Their current payout is 43%, so are they expecting a big jump in earnings, to keep the payout 30-35%?
Its obvious that they cant keep growing their dividends as they have done in the past.

[EricL]

Well, they provided fiscal 2016 earnings guidance of $4.25-$4.60 and a payout ratio of 30-35%.

This gives a range of $1.28-$1.61 in dividends, compared to $1.35 with today's increase.

I'd guess about a 10% increase next year as the acquisition is digested and then 10-15% going forward to match the expected earnings growth rate of the company.

[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.

[Roadmap2Retire]

Thanks for the analysis, DW. WAG hasnt been that high on my radar and I didnt know about the ABC deal. Good to know.
You are right - for long term horizons (like mine), its not a bad starting point but still the current PE of 20 is quite high. I will probably wait for a better entry point.

[fiveoh]

I added to my position today.

[Dividend Watcher]

This was on the Dow Jones news feed. I don't have a link to the original story -- it was part of the news section on TDAmeritrade's stock section. Emphasis is mine.

Quote:Some prominent Walgreen shareholders pushed the company to consider an inversion, as Alliance Boots is based in Switzerland, but after extensive discussions and analysis, the board decided not to risk it.

In 2012, Walgreen paid $6.7 billion to buy 45% of Alliance Boots, with an option to buy the rest next year. That accord would have had to be restructured to qualify as an inversion. But even then, the board felt that the arrangement might not easily pass muster with the Internal Revenue Service, with the potential to be hung up in litigation for a decade.

"We could not find a structure the board felt comfortable with," Walgreen Chief Executive Greg Wasson said in an interview Wednesday.
Walgreen will pay nearly $5.3 billion for the remaining stake and about $144.3 million shares, valued at about $10 billion, based on Tuesday's closing price.

For me, I'd rather the "corner of happy and healthy" spend the money on marketing and productivity enhancements than lawyers.

A 14% drop certainly makes one pause. I've outlined my thoughts on the company. I just looked and the price about where it was 6 months ago. I was happy holding it then.

(Also note the correction of my percentages of AB that WAG owns and what it's buying to my post above. That's what I get for not paying closer attention.)

[Kerim]

I picked just up a few more shares on the big drop. I don't think that it is a giant bargain at these new lower prices, and the yield is still not too exciting. But it is a great company, and fairly priced, and I feel like the drop was indeed an over-reaction. As WAG expands overseas, it should have a bright future ahead of it.