WBA - Walgreens Boots Alliance

[Viking]

Stock got crushed today (down 10%) thanks to Amazon’s purchase of online pharmacy Pillpack. I have not followed the company for years (but thought it was reasonably well run when I did). It reported results today; dividend was increased 10% and with the drop in the share price it now yields almost 3%. I am wondering if this stock would be an ok addition to a portfolio as a stalwart? Anyone have any insight?

 

“Walgreens Boots Alliance, Inc. (Nasdaq: WBA) today announced that its board of directors has authorized a share repurchase program for up to $10 billion of the company’s shares. The program has no specified expiration date.

 

The company also announced that its board of directors declared a quarterly dividend of 44 cents per share, an increase of 10 percent. The increased dividend is payable 12 September 2018 to stockholders of record as of 20 August 2018, and raises the annual rate from $1.60 per share to $1.76 per share. This marks the 43rd consecutive year that Walgreens Boots Alliance and its predecessor company, Walgreen Co., have raised the dividend.

 

Executive Vice President and Global Chief Financial Officer James Kehoe said, “Our new $10 billion share repurchase program demonstrates our commitment to return cash to stockholders in the form of dividends and share repurchases over the long term.”

[mwtorock]

I think it is a fair choice. Obviously folks believe that Amazon is going to disrupt the pharmacy industry like it did to the others. I like what the mgt team did over the years and the high stock ownership. Estimated owner's earnings are 6B for this year (10% yield), with growth rate in the teen without taking into account of the buybacks. They own big chunk of ABC, and that more or less offsets the Debt on the balance sheet. Q3 and Q4 should look better once RAD stores costs come down. Even WB should buy this 10% and growing yield probably.

 

I own both ABC and WBA.

[Sullivcd]

Closer to an 8% yield on enterprise value. Not worth it with the Amazon risk for me.

[KCLarkin]

I think it is a fair choice. Obviously folks believe that Amazon is going to disrupt the pharmacy industry like it did to the others.

 

It's interesting to look at stock performance and P/E ratios for other verticals that have had recent "Amazon scares" (COST, GWW, ORLY, SFLY). These companies all trade at significant premium to WBA. And all have performed well since their Amazon scares.

 

Will WBA be a good long-term holding? Hard to say. But this looks like a very good entry point for a medium-term trade.

 

You can buy a consumer-staple, dividend aristocrat for 9x 2019E.

 

Disclosure: No position since I already own a full position in CVS.

 

[Jurgis]

Disclosure: No position since I already own a full position in CVS.

 

What would be your comparison of WBA vs. CVS?

[dwy000]

Disclosure: No position since I already own a full position in CVS.

 

What would be your comparison of WBA vs. CVS?

 

I think WBA is a better operator but prefer the CVS vertical strategy that WBA has avoided (combining with PBM and now an insurer).  Stefano is the best operator out there but it's too susceptible to retail and partner risks.

[KCLarkin]

Disclosure: No position since I already own a full position in CVS.

 

What would be your comparison of WBA vs. CVS?

 

WBA is mostly a pure-play retailer. The vertically integrated model that CVS is pursuing is more appealing to me. But I don't think there is much to distinguish the two right now. Both have uncertain futures -- they are just different uncertain futures.

 

[mwtorock]

I dont think vertical integration is a good idea. For example, Atena now excludes WBA from the preferred pharmacy list, which had some impact on WBA's prescription volume right away. What other insurers gonna do now, excluding CVS?

 

Longer term, what if US becomes single payer?

 

One can only be good at so many things - pharmacy, pbm, and insurer are all different businesses. I dont see many synergies or benefits to go down that path.

[Spos]

WBA and CVS are the dominant pharmacies in the US with over 50% market share in many of the largest markets.  They both seem to be well run and have been able to take share from independents.  One thing that kept me away was that I was not comfortable with the front store.  I am just not sure what the future is for this retail segment.  Loblaw is making it work well at Shoppers, but I feel that the US market is more competitive and WBA and CVS seem to be struggling with it.

[Jurgis]

WBA and CVS are the dominant pharmacies in the US with over 50% market share in many of the largest markets.  They both seem to be well run and have been able to take share from independents.  One thing that kept me away was that I was not comfortable with the front store.  I am just not sure what the future is for this retail segment.  Loblaw is making it work well at Shoppers, but I feel that the US market is more competitive and WBA and CVS seem to be struggling with it.

 

I agree with this comment. We don't buy prescription meds pretty much and so we haven't been to Walgreens/CVS in ages. There's no point going there unless you need drugs. Well, sometimes they have a bigger selection of non-prescription meds ( anti-fever/anti-histamine ) than grocery supermarket. But that's pretty much it. There are probably people who go to Walgreens/CVS for non-pharma, but I don't know if front store is gonna continue to be a margin-positive business. 

[Spekulatius]

WBA and CVS are the dominant pharmacies in the US with over 50% market share in many of the largest markets.  They both seem to be well run and have been able to take share from independents.  One thing that kept me away was that I was not comfortable with the front store.  I am just not sure what the future is for this retail segment.  Loblaw is making it work well at Shoppers, but I feel that the US market is more competitive and WBA and CVS seem to be struggling with it.

 

I agree with this comment. We don't buy prescription meds pretty much and so we haven't been to Walgreens/CVS in ages. There's no point going there unless you need drugs. Well, sometimes they have a bigger selection of non-prescription meds ( anti-fever/anti-histamine ) than grocery supermarket. But that's pretty much it. There are probably people who go to Walgreens/CVS for non-pharma, but I don't know if front store is gonna continue to be a margin-positive business.

 

If AMZN can do next day delivery for Amazon Prime Users for prescription drugs, these guys are toast.

[frommi]

If AMZN can do next day delivery for Amazon Prime Users for prescription drugs, these guys are toast.

 

Of course! And if AMZN starts building cars, every car company on the world will be toast, too! And if they start industrial distribution every industrial distributor is toast! And if they start food delivery WMT and TGT are toast! .....

And don`t forget about all these retail locations that are toast!

[Jurgis]

Reading http://www.cornerofberkshireandfairfax.ca/forum/books/bad-blood-(theranos-story)-john-carreyrou/10/ - how much do we discount WBA for their involvement with Theranos? Or is it enough to write it off as CVS-competition-FOMO folly?

[Jurgis]

If AMZN can do next day delivery for Amazon Prime Users for prescription drugs, these guys are toast.

 

Of course! And if AMZN starts building cars, every car company on the world will be toast, too! And if they start industrial distribution every industrial distributor is toast! And if they start food delivery WMT and TGT are toast! .....

And don`t forget about all these retail locations that are toast!

 

I am actually looking for pushback on what I wrote. But your pushback IMO is not useful or productive. Amazon is working on delivering drugs to their customers. A hyperbole about cars is just that: a hyperbole that is not useful. You may have points about distributors and food delivery, but IMO drug delivery is way closer to what Amazon does well already. It would be much more interesting if you provided reasons why a customer will go to physical pharmacies even when good easy-to-use internet pharmacies with fast delivery exist. (I know some reasons, but I'll let others push back  ;) )

[Cigarbutt]

If AMZN can do next day delivery for Amazon Prime Users for prescription drugs, these guys are toast.

 

Of course! And if AMZN starts building cars, every car company on the world will be toast, too! And if they start industrial distribution every industrial distributor is toast! And if they start food delivery WMT and TGT are toast! .....

And don`t forget about all these retail locations that are toast!

 

Looking for pushback too.

 

-Online management of prescriptions and rapid/efficient delivery are definite competitive threats.

-The fact that WBA has developed AllianceRx supports that notion.

-WBA has relative strengths but I submit that it may be losing ground if it starts to copy what others are developing or if it starts to redefine itself in other directions.

-Thinking of Barnes and Noble, IMO, they ran into difficulties when they started to serve Starbucks coffee and avocado toast. When going to their luncheon sections, what people were looking for was the wi-fi connection.

 

The moat of retail pharmacies relies a lot on the fact that the pharmacy is at the back end of the store allowing people to consciously or unconsciously be exposed to other products. Developing and expanding the online experience will tend to be detrimental to the in-store results whether Amazon is involved or not.

 

Surviving is not thriving.

 

 

 

[frommi]

 

Looking for pushback too.

 

-Online management of prescriptions and rapid/efficient delivery are definite competitive threats.

-The fact that WBA has developed AllianceRx supports that notion.

-WBA has relative strengths but I submit that it may be losing ground if it starts to copy what others are developing or if it starts to redefine itself in other directions.

-Thinking of Barnes and Noble, IMO, they ran into difficulties when they started to serve Starbucks coffee and avocado toast. When going to their luncheon sections, what people were looking for was the wi-fi connection.

 

The moat of retail pharmacies relies a lot on the fact that the pharmacy is at the back end of the store allowing people to consciously or unconsciously be exposed to other products. Developing and expanding the online experience will tend to be detrimental to the in-store results whether Amazon is involved or not.

 

Surviving is not thriving.

 

I don`t think that anybody can know how that will play out or what happens in the future. Tobacco stocks were deemed to be dead for at least 25 years now, and they still belong to the group of best performing stocks over that timeframe.

 

I know that stocks that paid growing dividends for >3 years and that are trading at forward price/fcf<10 are very good investments. No need to overthink it, if you are right in 70% of cases you are already very good. If you do overthink it, you will miss out the good opportunities since everybody tries to dodge the stinkers. I had that with GWW and EAT last year. Especially EAT was a business i really hated buying. But when you buy so cheap a little bit of improvement will send the stock higher. And with so much free cashflow a good management team can do wonders. So maybe looking at capital allocation might improve the odds a little bit, and in the case of WBA you have a really good management team. I am not so sure about CVS in this regard, because in my opinion they overpaid on AET and used their undervalued stock doing it. Thats the reason my position in WBA is now larger than my position in CVS.

[bennycx]

i'd rather buy from a store and be able to speak to a pharmacist about my sickness than to purchase drugs online. It is something you consume, similar to food, than books.

[Jurgis]

But when you buy so cheap a little bit of improvement will send the stock higher.

 

That's fair if you buy for reversion to higher mean and sell then. I personally want to buy and hold for long time. So the reversion is good, but if the company is going to struggle going 5 years forward, then the reversion won't cover it. I don't want to end up in business where the management team is good, but the underlying pulls the carpet from their feet. 8)

 

But as I said it's fair enough.  8) And you are right that I will likely miss some opportunities this way... although I try to buy some and adjust based on confidence/outlook/whatever.  8)

 

Best

[Jurgis]

i'd rather buy from a store and be able to speak to a pharmacist about my sickness than to purchase drugs online. It is something you consume, similar to food, than books.

 

Are you in Europe?

 

It's common to talk to pharmacists (and use that word) in Europe. I don't think it's common in US. I maybe wrong but AFAIK they can't give you medical opinion in US or suggest alternatives etc. Although there's the minute clinics in CVS. Never used one. Maybe someone else can comment.

[frommi]

But when you buy so cheap a little bit of improvement will send the stock higher.

 

That's fair if you buy for reversion to higher mean and sell then. I personally want to buy and hold for long time. So the reversion is good, but if the company is going to struggle going 5 years forward, then the reversion won't cover it. I don't want to end up in business where the management team is good, but the underlying pulls the carpet from their feet. 8)

 

But as I said it's fair enough.  8) And you are right that I will likely miss some opportunities this way... although I try to buy some and adjust based on confidence/outlook/whatever.  8)

 

Best

 

I understand that and i also try to extend my holding period. Maybe just buy the cheap stuff and wait how it will play out and if after 1 year the business has not improved or you still think its a bad business you just sell? At least thats my approach now, EAT was one of the stocks i sold, but i still own VFC from last year and i will probably never sell it regardless of valution.

[KCLarkin]

We can chase ourselves in circles, but the reality is that mail order pharmacy already exists and is declining. People prefer to go to a physical pharmacy. Amazon might be able to come up with a disruptive offering. That is possible. And that risk is reflected in the price.

 

One reason that people might prefer going to a pharmacy is that most meds are purchased by older people. So the overlap between WBA customers and Prime customers might be less than expected.

[Spos]

We can chase ourselves in circles, but the reality is that mail order pharmacy already exists and is declining. People prefer to go to a physical pharmacy. Amazon might be able to come up with a disruptive offering. That is possible. And that risk is reflected in the price.

 

One reason that people might prefer going to a pharmacy is that most meds are purchased by older people. So the overlap between WBA customers and Prime customers might be less than expected.

 

The decline of mail order pharmacy was the thing that surprised me when looking at WBA (https://www.drugchannels.net/2017/06/latest-data-on-pharmacy-markets.html).  There is obviously a portion of medication that people start consuming right away.  If your doctor prescribes an antibiotic for an infection, you're not going to want to wait even for next day delivery. 

 

It's for chronic things where mail order should be growing, especially as it should be cheaper.  But the numbers say different.  I wonder if it's a generational issue.  Today's bi consumers of medication, the elderly, did not grow up with e-commerce and might not be comfortable ordering online.  The next generation might be more willing.

[Spos]

WBA and CVS are the dominant pharmacies in the US with over 50% market share in many of the largest markets.  They both seem to be well run and have been able to take share from independents.  One thing that kept me away was that I was not comfortable with the front store.  I am just not sure what the future is for this retail segment.  Loblaw is making it work well at Shoppers, but I feel that the US market is more competitive and WBA and CVS seem to be struggling with it.

 

I agree with this comment. We don't buy prescription meds pretty much and so we haven't been to Walgreens/CVS in ages. There's no point going there unless you need drugs. Well, sometimes they have a bigger selection of non-prescription meds ( anti-fever/anti-histamine ) than grocery supermarket. But that's pretty much it. There are probably people who go to Walgreens/CVS for non-pharma, but I don't know if front store is gonna continue to be a margin-positive business. 

 

One big department for the pharmacies is cosmetics.  I'm a guy so I don't have any insight here, but this is also where WBA is currently investing capital and seems to like the results so far.  I wonder if Shoppers works well as it is now plugged into Loblaw's distribution system and has increased its food offering (or if it's just a less competitive market up here in Canada).  Before moving, I had a Shoppers just around the corner and would go there for top-ups between trips to the grocery store.  I would see a lot of people who seemed to be doing their groceries there.  I haven't been to a WBA/CVS in a very long time, do they have large food selections?

[Jurgis]

Good observations Spos and KCLarkin.  8)

 

I agree with all 3 points:

1. Generational thing - old people don't order online.

2. Urgency - no wait for online delivery

3. Cosmetics - yes, Walgreens/CVS sometimes have more selection in cosmetics than grocery supermarkets.

 

I'll add #4 partially mentioned by Spos: At least in urban areas, people drop by Walgreens/CVS for snack/drink/etc. That's probably last couple of times I went to these shops.

 

Good job. ;)

 

WBA and CVS are the dominant pharmacies in the US with over 50% market share in many of the largest markets.  They both seem to be well run and have been able to take share from independents.  One thing that kept me away was that I was not comfortable with the front store.  I am just not sure what the future is for this retail segment.  Loblaw is making it work well at Shoppers, but I feel that the US market is more competitive and WBA and CVS seem to be struggling with it.

 

I agree with this comment. We don't buy prescription meds pretty much and so we haven't been to Walgreens/CVS in ages. There's no point going there unless you need drugs. Well, sometimes they have a bigger selection of non-prescription meds ( anti-fever/anti-histamine ) than grocery supermarket. But that's pretty much it. There are probably people who go to Walgreens/CVS for non-pharma, but I don't know if front store is gonna continue to be a margin-positive business. 

 

One big department for the pharmacies is cosmetics.  I'm a guy so I don't have any insight here, but this is also where WBA is currently investing capital and seems to like the results so far.  I wonder if Shoppers works well as it is now plugged into Loblaw's distribution system and has increased its food offering (or if it's just a less competitive market up here in Canada).  Before moving, I had a Shoppers just around the corner and would go there for top-ups between trips to the grocery store.  I would see a lot of people who seemed to be doing their groceries there.  I haven't been to a WBA/CVS in a very long time, do they have large food selections?

We can chase ourselves in circles, but the reality is that mail order pharmacy already exists and is declining. People prefer to go to a physical pharmacy. Amazon might be able to come up with a disruptive offering. That is possible. And that risk is reflected in the price.

 

One reason that people might prefer going to a pharmacy is that most meds are purchased by older people. So the overlap between WBA customers and Prime customers might be less than expected.

 

The decline of mail order pharmacy was the thing that surprised me when looking at WBA (https://www.drugchannels.net/2017/06/latest-data-on-pharmacy-markets.html).  There is obviously a portion of medication that people start consuming right away.  If your doctor prescribes an antibiotic for an infection, you're not going to want to wait even for next day delivery. 

 

It's for chronic things where mail order should be growing, especially as it should be cheaper.  But the numbers say different.  I wonder if it's a generational issue.  Today's bi consumers of medication, the elderly, did not grow up with e-commerce and might not be comfortable ordering online.  The next generation might be more willing.

[sys]

the need to have a prescription already makes it a high-friction transaction.  i don't have much experience with human prescription purchases, but do have some with vet prescriptions.  easiest is buy at the vet, second easiest is to grab the slip of paper and carry it somewhere local to complete the purchase.  most difficult is to fill out info and/or get the vet to fax or email the scrip to wherever you want to make the online purchase.

 

do doctors/hospitals have any incentive to streamline that process for amazon?