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Walgreens Boots Alliance Inc (WBA): A Healthcare Dividend Aristocrat Growing Through Acquisitions

Walgreens Boots Alliance Inc (NASDAQ:WBA) has steadily grown its dividend for 40 straight years and has an operating history that dates back more than 100 years.

Walgreens Dividend

Few businesses have demonstrated such durability, and the ones that have are always worth a look for our Top 20 Dividend Stocks portfolio. After all, it takes meaningful competitive advantages for a company to survive for such a long period of time.

Walgreens scores extremely well for Dividend Safety (97) and Dividend Growth (88), but there is a lot more to this drugstore’s business drivers than many dividend growth investors perhaps realize.

Among the hedge funds and institutional investors followed by Insider Monkey, Walgreens Boots Alliance registered a decline in popularity with the number of funds holding long positions in the company having fallen to 78 from 91 during the last quarter of 2015. Consequently, the total value of their holdings slid to $6.90 billion from $9.51 billion and represented 7.40% of the company’s outstanding stock.

Business Overview

Walgreens is a global leader in the retail pharmacy market with more than 13,100 stores in 11 countries. Walgreens Boots Alliance’s drugstores sell a range of prescription and non-prescription drugs in addition to a number of consumer products in categories such as beauty, personal care, and grocery.

Walgreens’ roots can be traced back to humble beginnings in Chicago in 1901, but the business has since expanded organically and through major acquisitions to become a leading international player.

Walgreens Boots Alliance operates in three segments. Retail Pharmacy USA is its largest segment and accounted for 69% of sales and 72% of segment income in its first quarter of fiscal 2016. This division consists of Walgreens and Duane Reade branded drugstores in the U.S.

Retail Pharmacy International represented approximately 12% of sales and 18% of segment profits and consists of Alliance Boots, one of the largest drugstores in Europe that Walgreens fully acquired in 2014.

The company also has a Pharmaceutical Wholesale business that generated 20% of sales and about 10% of segment income. This segment operates under the Alliance Healthcare brand and supplies medicines and a variety of healthcare products to over 200,000 pharmacies and other healthcare institutions from more than 350 distribution centers.

Business Analysis

Retail pharmacy is a highly competitive and relatively mature industry. There are few noticeable differences inside of a Walgreens or CVS store, which causes companies in the industry to compete largely on price, brand recognition, and convenience of store locations.

The two major drugstores that dominate the market are Walgreens and CVS. Each player has done its part in consolidating the market.

Walgreens acquired U.S. drugstore chain Duane Reade for $1.1 billion in 2010 and bought a 45% interest in Alliance Boots, a major pharmacy player in Europe, for $6.7 billion in 2012.

The company purchased the rest of Alliance Boots in 2014 to give it a presence in faster-growing international markets and further expand its scale. With Alliance Boots, Walgreens became the biggest buyer of generic drugs in the world and expects to generate at least $1 billion in cost savings.

Most recently, Walgreens announced a deal to acquire Rite-Aid for $17.2 billion in 2015. This acquisition is expected to close in late 2016 and will provide better national coverage for Walgreens’ customers.

Why is the industry consolidating? Essentially, there is a building amount of pressure to take costs out of the healthcare system. Falling government reimbursement rates for prescriptions and consolidation throughout other parts of the healthcare chain are putting pressure on players like Walgreens to take costs out of their businesses.

By acquiring other drugstores, Walgreens gains significant cost synergies from procurement savings on the purchase of drugs and merchandise. With more than 720 million prescriptions filled last fiscal year, Walgreens is one of the biggest purchasers of prescription drugs and healthcare products.

As such, the company can offer customers lower costs compared to its smaller rivals. Its 2013 supply deal with distributor AmerisourceBergin is one example of the favorable contracts a company of Walgreens’ size can attain. Smaller retail pharmacy companies will become increasingly uncompetitive as their scale becomes even smaller compared to Walgreens.

In addition to economies of scale, Walgreens benefits from owning some of the best real estate in the country. According to the company’s annual report, approximately 76% of the U.S. population lives within five miles of a Walgreens or Duane Reade retail pharmacy.

Once its acquisition of Rite-Aid closes later this year, that number will increase even further as the company’s national coverage further expands.

Convenient store locations have helped Walgreens generate one of the top 100 most powerful brands in the world and make it an obvious shopping choice for many consumers. It also benefits from lengthy operating histories dating back to the early 1900s for Walgreens and 1849 for Boots Alliance.

In addition to its strong brand recognition and convenient store locations, Walgreens Boots Alliance’s websites receive about 68 million visits per month, providing a convenient platform for customers to refill their prescriptions.

By making it easy to refill orders, Walgreens gets more traffic through its doors. While prescriptions account for over 65% of revenue in the company’s U.S. stores, sales of retail merchandise carry higher margins.

As long as Walgreens makes it easy and affordable for customers to fill prescriptions with the company, it enjoys a steady base of sales.

Finally, it’s worth mentioning that Walgreens Boots Alliance should benefit as the elderly population continues to grow in size and healthcare reform results in more insured Americans, driving more demand for prescriptions.

While healthcare reform is resulting in several benefits for the company, it also poses several risks.

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