BIOS BioPlus Acquisition Corporation

Walgreen (WAG) recently declared a 28.6% hike in its regular quarterly dividend to 22.5 cents per share. It is encouraging to note that the company has been paying dividends for more than 79 years and the recent hike marks the 36^th consecutive quarter of dividend increase for the company.

Although the current dividend-payout ratio is 30% for fiscal 2011, the company has set a long-term dividend payout target of 30%-35% of net earnings. Over the last five years, Walgreen’s dividend has grown at a compound annual growth rate of 23.8%.

At the end of second quarter 2012, Walgreens had $1.08 billion in cash and cash equivalents, compared with $2.2 billion at the end of February 2010. Year-to-date, the company’s net cash provided by operating activities was $1.8 million.

With a strong cash position, the company always strives to benefit its shareholders through dividend payments and share repurchases. During the last reported quarter, the company returned $570 million to its shareholders through share repurchases and dividend payments compared with $462 million in the year-ago quarter.

Moreover, the healthy cash balance enables the company to pursue suitable acquisitions, which should drive its revenues going forward. Earlier, in February, specialty pharmacy services provider BioScrip Inc. (BIOS) and Walgreen entered into a definitive agreement, under which the latter will acquire certain community specialty pharmacies and mail service pharmacy business assets of BioScrip for $225 million. Walgreen anticipates the transaction to have no material impact on its earnings in fiscal 2012. However, the transaction will be moderately accretive in fiscal 2013.

On a long-term horizon, we are optimistic about Walgreen. Apart from strong cash balance, the introduction of new generics should help improve the company’s gross margin in the second half of fiscal 2012. However, the company has been impacted over the past few quarters by high unemployment levels and lower discretionary spending.

Moreover, the termination of the Express Scripts (ESRX) contract continues to hurt Walgreen sales and has resulted in a sluggish start for third quarter 2012. In March 2012, the company recorded a year-over-year dip of 4.3% in total sales to $6.02 billion.

Currently, Walgreen retains a Zacks #3 Rank (short-term Hold rating). We have a ‘Neutral’ recommendation on the stock over the long term.

 
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