Walgreens and CVS: A Comparative Analysis of Dividend Prospects

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Walgreens and CVS: A Comparative Analysis of Dividend Prospects
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Walgreens Boots Alliance ( NASDAQ : NASDAQ: WBA ) and CVS Health (NYSE: NYSE: CVS ), two leading pharmacy retailers, offer attractive yields to investors. However, the companies' differing financial situations and growth strategies present distinct opportunities and risks for dividend investors.

On Thursday, Walgreens' stock yield stood at 8.6%, significantly higher than the S&P 500 's payout of less than 1.6%. To generate a $1,000 dividend, an investment of approximately $11,600 in Walgreens stock would be required. The company has a long-standing history of consistent payouts, having increased its dividends for decades and maintained payments for over 90 years.

Despite this, investors have shown bearish sentiment towards the company due to deteriorating earnings, the recent departure of its CEO, and lowered guidance for the year. The stock has dropped more than 40% this year. Nevertheless, Walgreens still projects adjusted earnings per share of at least $4 for the current fiscal year, implying a payout ratio of less than 50%.

The company is heavily investing in primary care to enhance growth prospects and recently raised projections for its transformational cost savings program from $3.5 billion to $4.1 billion. Despite the challenges it faces, Walgreens' low trading multiple of less than six times its estimated future earnings provides a margin of safety that could make it an appealing contrarian buy.

In contrast, CVS Health offers a smaller dividend yield of 3.5%, requiring an investment of close to $28,600 to earn $1,000 in dividend income. However, with $17.7 billion in free cash flow over the trailing 12 months against dividend payments costing just $3 billion during that period, CVS has ample room to maintain or even increase its dividends.

CVS's recent acquisitions of Signify Health and Oak Street Health further diversify and expand its long-term growth opportunities. While Walgreens has struggled with cash flow, CVS has demonstrated more generous rate increases over the past decade. With strong free cash flow to support future growth and dividends, CVS offers a blend of income and growth potential. At eight times its expected future profits, CVS also presents a relatively cheap investment opportunity.

High-yielding dividend stocks can be attractive, but the risk lies in investing solely for the payout. If a company slashes its dividend, the incentive to hold the stock could evaporate. In this comparison, CVS appears to be the more stable business with better growth prospects than Walgreens. Despite Walgreens' higher yield, its poor cash flow and the need for continued funding of its healthcare business could strain operations and potentially lead to changes in dividend policy. CVS, with its solid valuation, robust growth potential, and strong free cash flow, could offer higher recurring income in the future.

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