Buy this dividend aristocrat for gains, cash, safety

We expect consumer stock Walgreens Boots Alliance to deliver long-term share price gains. We also expect this ‘dividend aristocrat’ to continue to raise its dividend each year. And we further expect it to protect your money if the North American Free Trade Agreement is cancelled.

DividendAristocratMontreal-based consumer retail stock Metro Inc. (TSX—MRU) will soon acquire Montreal-based consumer healthcare stock Jean Coutu Group (TSX—PJC.A). And Toronto-based consumer retail stock Loblaw Companies (TSX—L) formerly acquired Shoppers Drug Mart.

But you may want to own a drugstore chain. Many are highly profitable. As part of a bigger company, however, the drugstores’ operations often have less impact. In addition, foreign companies will face a much lower impact if the re-negotiation of NAFTA (North American Free-Trade Agreement) fails (see below).

As a result, we rate Deerfield, Illinois-based consumer stock Walgreens Boots Alliance Inc. (NASDAQ—WBA) a buy. American drugstore chain Walgreens’ former acquisition of British drugstore chain Boots created a giant in the industry.

WBA writes that it “is the world’s premiere drug distributor, anchored by its network of drugstores in North America and Europe”. In 2016, the company generated two-thirds of its sales from drugs and a third from general merchandise.

WBA’s earnings have risen every year since fiscal 2012. In the year to August 31, 2018, the company’s earnings are expected to grow by 8.8 per cent, to a record $5.55 a share. Based on this estimate, the shares trade at an attractively-low P/E (price-to-earnings) ratio of 12.9 times. Next year, WBA earnings are expected to grow by 8.3 per cent, to $6.01 a share. Based on this estimate, the shares trade at an even better P/E ratio of 11.9 times.

This dividend aristocrat should continue its record

In the United States, dividend aristocrats are companies that have raised their dividends for at least 25 years in a row. This is a much stricter criterion than the five years required in Canada. After increasing its dividends for 43 years in a row, WBA is a long-established dividend aristocrat.

The current dividend of $1.60 a share yields a decent 2.24 per cent. This yields more than long-term government bonds. This will appeal to investors who need higher current income. We also expect WBA to continue to improve its dividend each year. This should attract income-seeking investors who want to stay ahead of inflation in the years to come. They’ll likely bid up the price of your shares in the years ahead.

WBA’s growing dividends are only natural. That’s because officers and directors own 13.5 per cent of the shares. They, too, profit from rising dividends. Management’s ownership makes its interests similar to yours. It’s best when management has what’s known as ‘skin in the game’. This way, they have a substantial financial incentive to do a good job. This works to your benefit of course.

Expansion continues

WBA is expanding. It has agreed to pay $5.175 billion to buy 2,186 drugstores of struggling Rite-Aid. We expect it to do a better job managing these stores. In fiscal 2018, WBA is expected to earn a healthy return of 17 per cent on each dollar of shareholders’ equity.

WBA expects to close the transaction in January. In the following 12 months it expect the stores to add to its profits. The company also expects to wring out ‘synergies’ of $400 million in three to four years. This should give it growing earnings.

Meanwhile, Rite-Aid is expected to lose 10 cents a share in year to the end of February. That’s a negative return on equity. The company has not paid a dividend since at least fiscal 2001—as far back as we looked.

The consensus recommendation of nine analysts is that WBA is a buy. We agree. Buy it for safety, further long-term share price gains as well as decent and growing dividends.

Buy more foreign stocks

The re-negotiation of the North American Free-Trade Agreement (NAFTA) is in doubt.
Some accuse the Americans of negotiating in bad faith and making demands Canada and Mexico can’t accept. President Donald Trump could then tell supporters that he tried to renew what he formerly called the worst trade deal ever. But that due to the intransigence of Canada and Mexico, he had to cancel NAFTA.

We’ve seen analyses of the expected impact of NAFTA’s failure. Most seem overly-optimistic to us. We would expect the loonie to plunge relative to other currencies. Particularly if the Bank of Canada cut interest rates. We would expect significant economic dislocation and a drought in capital investment. Holding more foreign stocks, such as Walgreens Boots Alliance would lessen the blow.

This is an edited version of an article that was originally published for subscribers in the December 15, 2017, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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