Walgreens Boots Alliance (NASDAQ:WBA) Is A More Compelling Buy Than Ever

We Like Walgreens Boots Alliance

Walgreens Boots Alliance (NASDAQ:WBA) has caught the eye of more than one analyst here at MarketBeat, and only for good reasons. I myself wrote about this stock in July, comparing it to CVS (NYSE:CVS) and coming away with the feeling this stock was a great buy for long-term oriented dividend-growth investors. My colleague Sam Quirke calls the stock a diamond in the rough. Looking at the charts you might not understand why we think so because share prices have been falling all year. When you dig into the numbers the reasons should become very clear indeed.

Walgreens Beats And Raises, Shares Move Higher

Walgreens Boots Alliance reported a solid fiscal 4th/calendar 3rd quarter. The company says revenue grew 2.4% YOY to $34.75 billion on strength in pharmacy and eCommerce channels. The top-line figure came in $0.390 billion above consensus or roughly 1200 basis points. Moving down, margins came in above expectations as well. The gross margin came in at20.2% versus the 19.5% expected while operating margins of 3.3% beat by a tenth.

The bottom line results are equally encouraging. Adjusted EPS came in at $1.02 or $0.06 above the consensus target. The GAAP EPS is the only dark spot but even that is mitigated by other data. GAAP EPS came in at $0.43 missing consensus by $0.28 but the $520 million in one-time COVID-related costs more than offsets the difference.

Along with the report the company inclined to give us guidance for the upcoming year. The company says it is expecting EPS growth in the low single-digits which is in-line with consensus. The caveat is that guidance is probably conservative for a couple of reasons. The first is that the pandemic brings an edge of uncertainty that can’t be overcome, the 2nd is that investment in company operations are expected to accelerate growth in the 2nd half of the year. The takeaway for us is that Walgreens will grow earnings next year and probably stronger than currently expected.

Walgreens Is A High-Yield Value No Matter How You Slice It

Walgreens is a high-yielding stock delivering 5.2% in annual returns with shares trading near $38. The yield is a bit of a red flag, high yielders often turn into lower-valued low-yielders, but this payment is safe. The payout ratio is a low 40%, the company’s debt is well-managed, and there is ample free-cash-flow in addition to the outlook for earnings growth. No reason to suspect a cut or a suspension, either of which I think is highly unlikely in light of the payout history. Regarding the payout history, the company has a long history of dividend increases that have it set up to reach Dividend King status in only a few more years.

As for value, the stock is trading in line with its peer CVS (about 8X EPS) but CVS pays a much lower 3.4% yield. Rite Aid Corporation (NYSE:RAD), another peer, is still struggling with negative earnings and doesn’t pay a dividend so there is no comparison to be made. Looking at the broader Consumer Staples sector most stocks in that group are trading between 12X and 30X earnings with yields in the range of 5.0% to 2.0%. The takeaway here, there is no consumer staple or comparable stock trading at as low a valuation and paying as good a dividend. It’s that simple.

The Technical Outlook: Walgreens Looks Ready To Reverse

Shares of Walgreens have been trending lower all year despite its position as a pandemic winner, its high yield, its low valuation, and outlook for earnings. I find this surprising but oh well, that’s just cheaper stocks for me I guess. More recently, however, price action has formed a bottom and today’s earnings news has the stock moving higher.

The 5% gain has the stock above the 30-day moving average and trading at a one-month high that is confirmed by the indicators. The indicators are a little mixed, MACD looks strong but stochastic is lagging a bit, but consistent with support and a budding new bull-market. Longer-term, assuming the irrational downtrend is finally over, this stock could easily gain 12% to 25% within the next two to three quarters.