CHSI Catalyst Health Solutions, (MM)

Walgreen (WAG) has declared a regular quarterly dividend of 17.5 cents per share, up 27.3% from the year-ago quarter. It is encouraging to note that the company has been quite consistent in paying dividends and has been raising it for 35 consecutive quarters.

Although the current dividend-payout ratio is 26% (for fiscal 2010), the company has set a long-term dividend payout target of 30%-35% of net earnings. In the last seven years, Walgreen’s dividend has grown at a compound annual growth rate of nearly 22%.

Walgreen exited the second quarter of fiscal 2011 with $2.2 billion in cash and cash equivalents, down from $2.5 billion at the end of February 2010. The cash flow trends of the company remained strong during the quarter with $886 million of cash flow from operations, up almost 50% from $595 million in the year-ago quarter. Moreover, free cash flow increased more than 80% to $690 million during the quarter.

With a strong cash position, the company tries to benefit its shareholders through dividend payments and share repurchases. During the last reported quarter, Walgreen repurchased $300 million worth of stocks and paid $162 million in dividends. Moreover, a strong cash balance is likely to support the company in making suitable acquisitions, which should drive its revenues going ahead.

Over the past several years, Walgreen has been taking a number of steps to align its assets with core strategies. These include the acquisition of Cardinal Specialty Pharmacy Business and an agreement with Omnicare to divest its long-term care pharmacy business in exchange of the latter’s home infusion business. Thereafter, Walgreen decided to sell its PBM business to Catalyst Health (CHSI) for $525 million in cash.

By divesting its non-core assets, Walgreen will be able to better focus on its 7,700 drug stores. The benefits from these initiatives will be experienced over a period of time. However, the company has been impacted over the past few quarters by high unemployment levels and lower discretionary spending.

We are currently Neutral on the stock.

 
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