CVS vs Walgreen’s Stock: Which is Best?

Investor disappointment followed the Biden administration’s announcement to not boost payments for private Medicare plans. Shares of health insurers fell as the industry grappled with high costs and other uncertainties.

Big pharmacies, including CVS Health Corporation (NYSE:CVS) and Walgreens Boots Alliance, Inc. (NASDAQ:WBA) fell by 6.5% and 11.8% over the past week, respectively, compared to the 2.9% loss experienced by the broader-based healthcare sector proxy iShares U.S. Healthcare ETF (NYSEARCA:IYH) over the same period.

In light of the correction, do investors have a buy-the-dip opportunity or are further declines on the horizon?

Is CVS Health Growing?

Starting as a Consumer Value Store in 1963 in Lowell, Massachusetts, CVS Health has expanded over the years to become a popular pharmacy brand that has grown by organic means as well as through acquisition.

Notable among them is its purchase of health insurance provider Aetna in 2017. Indeed, CVS became the largest private provider of COVID-19 testing and became one of the first companies to offer on-site vaccinations.

The company has consistently grown its top line with expansions across segments for quite some time now. Between fiscal 2020 and fiscal 2021, total revenue grew by 8.7%. Revenue rose by 10.4% between fiscal years 2021 and 2022. Finally, in FY 2023, revenue climbed by 10.9%. 

On the other hand, bottom-line growth has not been steady. Between 2020 and 2021, net income attributable to CVS Health grew 10.2%, while a rise in operating costs led to a decline of 47.5% between 2021 and 2022. This reversed to a 93.6% increase in 2023.

However, the same cannot be said for the company’s financial expectations. For fiscal year 2024, CVS Health decreased adjusted earnings per share guidance from at least $8.50 to at least $8.30. The company also expects cash flow from operations to be at least $12.0 billion, down from the earlier forecast of at least $12.5 billion. The forecast revisions came after the company’s cost analysis, reflecting potentially elevated medical costs.

As a healthcare giant, CVS Health pays a stable dividend. After five years of paying an annual dividend of $2 per share, the company started increasing dividends once again in 2022. It last declared a regular quarterly cash dividend of $0.665 per share in March, which is payable to shareholders on May 1.

CVS’ annual dividend of $2.66 yields 3.6% on prevailing prices, higher than its four-year average yield of 2.75%. It also has a conservative payout ratio of 27.69%. This year, CVS anticipates paying $1.33 per share more in dividends.

Is Walgreens Boots Alliance a Solid Investment?

With a 170-year history, Walgreens Boots Alliance has also significantly diversified operations since its original store concept that sold herbal remedies.

Like CVS, Walgreens has made a slew of acquisitions and expanded into the home care, specialty pharmacy care, and pharmaceutical sectors, among others.

While its growth has been notable, WBA share price has declined for quite some time. Over the past five years, the stock has fallen by more than 65%. This subdued stock performance led to the company being replaced in the Dow Jones Industrial Average by, Inc. (NASDAQ:AMZN).

The company’s annual sales have seen marginal to moderate year-over-year growth in the recent past. For the second quarter of fiscal 2024, Walgreens’ sales improved by 6.3% from the prior-year period to $37.05 billion.

However, adjusted gross margin followed an almost declining trend. For fiscal years 2020 through 2023, it was 21.6%, 21.2%, 21.4%, and 19.7%, respectively. For Q2 2024, it was 19.1% compared to 20.5% a year ago.

The company did announce management changes since last year. Tim Wentworth joined as the new Chief Executive Officer last year. Also, there were other leadership appointments this year.

Walgreens’ new leadership had to take the tough decision to slash its quarterly dividend by 48% from the previous quarter to $0.25 per share, payable to shareholders on March 12. Still, the annual dividend of $1.00 yielded an impressive 5.27% with a payout ratio of 47.88%, a very reasonable figure.

What Lies Ahead for CVS and WBA? 

CVS Health announced last year its CostVantage approach, aiming to simplify its traditional pharmacy reimbursement model.

The company hopes to launch CostVantage with pharmacy benefit managers (PBMs) for their commercial payers in 2025. These developments come when the company diversifies into a healthcare giant from a primarily drugstore business.

Walgreens Boots Alliance is reportedly reattempting the sale of UK pharmacy chain Boots, valuing the business at about £7 billion ($8.85 billion). Previously, the separation of Boots was unable to be carried out with financial conditions cited as the cause.

CVS vs Walgreens Stock, Which Is Best?

On a valuation basis, CVS appears to be the better stock to buy than Walgreens given that it has 19.3% upside to fair value versus just 15% for Walgreens.

Despite the medicare trouble, wide moats and inelastic demand make the healthcare giants buy-and-hold candidates.

The price declines for both stocks have pulled their valuations down. CVS’ forward non-GAAP price-to-earnings of 8.99x is significantly lower than industry standards. The ratio also represents an 8.3% discount to its 5-year average.

Similarly, Walgreens is trading at just 5.9x forward non-GAAP earnings, significantly lower than the industry peers and roughly 30% lower than its 5-year average.

Given Walgreens’ dividend cut and analysts’ lack of optimism about the stock, CVS might also be a better pick now. The majority of analysts believe CVS is a buy candidate.  

Further support for CVS comes from its strong free cash flow yield, the fact that it’s trading at a low revenue multiple, has a low price-to-earnings ratio and enjoys a strong management buyback scheme. Add those factors to 54 years straight of consecutive dividend payments and a record of strong profitability over the past year, and it’s a stock that any healthcare investor won’t want to ignore.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.