Dividend stock bargain #2: A top drugstore chain at a discount

In my last post I highlighted a utility stock that was trading 60% below its 2008 highs and paying an over 6% dividend yield. In this post I look at something completely different – the much lower yielding, but much faster-growing dividend stock of Walgreen Co. [[WAG]], the largest drugstore chain in the United States:

Stock chart for Walgreen (WAG)

Walgreen Co. operates more than 7,000 drugstores across the U.S., Guam and Puerto Rico, with prescription drugs accounting for more than half of its sales and the rest from over-the-counter medications and general merchandise. The company recently acquired Duane Reade, a New York City-based drugstore chain of 257 stores that should significantly boost the company’s position in the country’s largest retail and drugstore market.

Walgreen’s stock price has been especially weak recently on disappointing earnings news and a highly publicized – and since resolved – contract dispute with rival CVS Caremark. In addition, the Duane Reade acquisition is expected to slightly reduce fiscal 2011 earnings.

Other concerns include a slowing economy, costs from healthcare legislation, prescription reimbursement issues, and a (temporary) slowdown in the introduction of generic drugs. Positives include the company’s strong operating history, clean balance sheet and restructuring efforts, as well as favorable long-term demographic trends.

Currently trading at about $26 and yielding 2%, shares of WAG are in a clear intermediate-term downtrend. At the same time they’re becoming extremely oversold – perhaps setting up to stabilize/bottom out somewhere around support in the low-to-mid $20s in the coming weeks/months.

Fundamentally, even accounting for somewhat reduced earnings expectations, WAG appears attractive here, with current fair value estimates ranging from the low $30s up to over $50, with an average fair value estimate in the mid-to-high $30s. The company’s dividend record is attractive as well: it has achieved 34 years of consecutive dividend increases with a recent dividend growth rate of over 20%, earning it a five-star rating from DividendInvestor.com and a place among Standard & Poor’s Dividend Aristocrats.

If this weren’t reason enough to consider the stock here, the company in its latest conference call confirmed that it has targeted a long-term dividend payout ratio of between 30% and 35% – an increase from the current payout ratio of 25% – which would add a nice boost to the dividend yield. I currently have a short options position in WAG that could result in me being “put” the stock at a net cost basis of around $27, and would otherwise consider buying the stock outright at around current levels or lower as a long-term dividend growth investment.

For some other recent takes on WAG see the following links:

From Barron’s (via Google for full article): Walgreen Set for Turnaround
From Dividend Growth Investor: Walgreen (WAG) Dividend Stock Analysis
From Investopedia: Walgreen’s Growth Is Slow Going
From Ockham Research: WAG Stock Evaluation

Related posts:
Dividend stock bargain: A high-yielding utility stock on sale
Dividend stock bargain #3: An oil & gas giant at almost half price

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