Is Walgreens doomed?

Drugstore Goliath Walgreens Boots Alliance (NASDAQ: WBA) scared Mr. Market with hints of going private last week.

To explain, the rumor mill claims Walgreens CEO Stefano Pessina has been talking to private-equity firms about a leveraged buyout (LBO) of the world’s largest drugstore operator. Barron’s speculates that Pessina has hired a banker to handle the LBO.

MaretWatch estimates the potential value of a Walgreens LBO at $70 billion. However, Yahoo! Finance estimated Walgreens had a Market Cap of $55.561 billion on 11 November 2019. Thus, a Walgreens LBO could be one of the biggest deals in years on Wall Street.

Bloomberg claims private equity giant KKR & Co is offering $70 billion for Walgreens. Bloomberg estimates the KKR & Co offer for Walgreens could be the biggest private LBO yet. Thus, Pessina, Walgreen’s largest shareholder, could make money from that deal.

Could Walgreens Go Private?

Pessina could be interested an LBO because he thinks Mr. Market undervalues Walgreens stock. The company’s share price is low. Traders paid $62.25 for Walgreens (NASDQ: WBA) shares on November 11, 2019.

Pessina; the largest Walgreens shareholder, is 78 years old so he could want to retire. In particular, Pessina could be sick of pharmacy industry headaches such as falling prescription prices, political pressures, and popular anger at high drug prices.

Troubles Pessina could want to escape include; the never-ending Brexit nightmare in the UK, and rising demands for single-payer healthcare (Medicare for All) in the United States. Currently, Walgreens Boots Alliance owns 2,465 stores in the United Kingdom and 9,244 drugstores in the United States.

Walgreens’ troubles in the United States are growing. Notably, the company plans to close 200 American drugstores, CNBC claims. CNBC describes the closures as a “cost-cutting move.”

Walgreens and the Opioid Crisis

Dramatically, The Washington Post accuses Walgreens of distributing 13 billion oxycodone and hydrocodone pills across America between 2006 and 2012. To clarify, oxycodone and hydrocodone are highly addictive; opium-based, painkillers critics blame for America’s opioid crisis.

Tellingly, in 2013, Walgreens paid a $80 million fine to the Drug Enforcement Agency (DEA). The Post claims, the DEA accused of Walgreens of knowingly selling oxycodone and hydrocodone to criminals who sold it on the black market.

Walgreens is a defendant in a federal lawsuit against opioid distributors in Ohio. In the suit, two county governments accuse Walgreens and other companies of knowingly flooding their communities with opioid pain killers. Tellingly, Walgreens is not participating in a settlement between two Ohio counties and opioid distributors.

Walgreens denies the allegations. However, Walgreens stopped the internal distribution of controlled substances; including opioids, to its drugstores in 2014.

It’s easy to see why Pessina could want out. The drugstore business is increasingly unpopular and controversial.

Is Walgreens Making Money?

However, Walgreens (NASDAQ: WBA) makes money from its drugstores. Walgreens reported a quarterly gross profit of $7.227 billion on 31 August 2019.

Walgreens made that gross profit off quarterly revenues of $33.954 billion. However, Walgreens’ quarterly revenues were down from $34.591 billion on 31 May 2019. Yet, Stockrow estimates Walgreens revenue growth rate at 1.53% for last quarter.

On the other hand, Walgreens’ income is falling. For instance, Walgreens; quarterly net income fell from $1.025 billion on 31 May 2019 to $667 million on 31 August 2019. In addition, operating income fell from $1.218 billion on 31 May 2019 to $983 million three months later.

In contrast, Walgreens’ cash flow is growing. Walgreens’ operating cash grew to $2.379 billion in August 2019 from $2.02 billion in May 2019. Plus, the free cash flow grew from $1.567 billion to 1.923 billion in the same period.

However, Walgreens had just $1.023 billion in cash and equivalents on 31 August 2019. Thus, Walgreens has a low margin of safety and falling levels of cash.

Is Walgreens losing Value?

Interestingly, Walgreens is losing value.  The value of Walgreens’ total assets fell from $70.434 billion on 28 February 2019 to $68.586 billion on 31 May 2019 to $67.598 billion on 31 May 2019.

Meanwhile, Walgreens reported total current liabilities of $25.769 billion and total debts of $16.836 billion on 31 August 2019. Thus, Walgreens’ assets are losing value while its debts are growing.

Thus another reason Pessina could think of selling out, is that he thinks pharmacies are less profitable. Notably, that profit is falling when Amazon (NASDAQ: AMZN) is stepping up its game.

The Amazon Menace Grows

Amazon already directly competes with Walgreens in categories like cosmetics, perfumes, toiletries, and cleaning supplies. Now, Amazon is eyeing the drugstore business with its PillPack subsidiary. PillPack ships prescriptions to customers.

Moreover, Amazon is offering free one-day delivery on $2 items, Money claims. Hence, Amazon is trying to compete directly with neighborhood retailers like drugstores.

Tellingly, the free shipping items at Amazon Money describes sound like a Walgreens’ shopping list. Items you can now order with free shipping from Amazon include: a $1.54 box of Huggies wipes, a $1.83 tube of Colgate toothpaste, a $2.48 package of Extra gum, and a $3 bag of cotton balls.

Walgreens sells all those items. Hence, Amazon Prime customers  no longer have any reason to go Walgreens’ and other neighborhood stores. Consequently, one of Pessina’s big fears could be a large drop in foot traffic because of Amazon.

Is Walgreens a Good Dividend Stock?

Many investors like Walgreens (NASDAQ: WBA) because it has historically been a good dividend stock.

For instance, Dividend.com estimates Walgreens dividends have grown for 43 years straight. Correspondingly, the next scheduled Walgreens dividend is 46₵; scheduled for 15 November 2019.

Walgreens’ investors received a dividend yield of 3.12%, an annualized payout of $1.83, and a payout ratio of 33.55% on 11 November 2019.

In the final analysis, Walgreens is a good low-cost dividend stock. Hence, Walgreens is a value investment, but it is a company that shows how unstable and risky the retail environment has become.

Amazon is disrupting the entire retail ecosystem, and threatening historically stable brands that have been long term money makers. Hence, investors need to be careful with retail stocks these days. Even the best retailers face disruption and doom in the Age of Amazon.