CVS Well being (CVS 1.41%) and Walgreens Boots Alliance (WBA -1.17%) are two prime names in healthcare. CVS is bigger and extra various than its rival, which focuses on pharmacy retail. However quickly, the 2 may very well be on a collision course once more as they each develop into major care.
Nevertheless, over the previous 12 months, their share costs have been diverging, with CVS inventory rallying 21% whereas shares of Walgreens have plummeted by 27%. Will this development proceed, and are traders higher off going with CVS, or can Walgreens rally from its lower cost level?
The case for CVS
CVS is sensible as an funding for risk-averse traders searching for diversification and general stability. Previously 12 months, CVS’ income totaled slightly below $308 billion. Walgreens generates lower than half of that, reporting roughly $135 billion over its final 4 quarters.
CVS’ enterprise is broader than simply pharmacy retail and likewise features a pharmacy advantages administration enterprise, a medical health insurance firm, and probably a house well being enterprise as nicely, because it not too long ago introduced plans to accumulate Signify Well being. On a current earnings name, the corporate additionally hinted at a giant transfer, planning to get into major care, additionally probably by an acquisition.
Already a prime healthcare firm, CVS is planning to get even greater and stronger. And it has the sources to take action, producing free money circulate of almost $16 billion in simply the previous 12 months. That provides the corporate ample room to tackle acquisitions whereas nonetheless paying dividends (which value the corporate lower than $3 billion yearly).
At the moment, the inventory’s dividend yield is 2.2%, which might make CVS a good higher purchase for long-term traders who simply wish to purchase and neglect about it whereas gathering some recurring revenue because the enterprise grows.
The case for Walgreens
Walgreens is an underdog when in comparison with CVS. However as an underdog, it additionally has extra potential to shock traders and, thus, result in greater beneficial properties. At round $36 a share, Walgreens inventory is buying and selling at a depressed price-to-earnings a number of of simply 6. CVS, by comparability, trades at a a number of of almost 17.
Though its low-cost valuation and struggling inventory worth would possibly counsel Walgreens is a price entice, the inventory does provide traders some promising potential. In spite of everything, that is nonetheless a enterprise that has generated $3.4 billion in free money circulate over its final 4 quarters — greater than double what it has paid out in dividends ($1.7 billion).
Money is king, and it gives the corporate with the sources it must tackle new initiatives and capitalize on new alternatives. One such instance is the corporate’s $5.2 billion funding into major care firm VillageMD final 12 months. By means of that deal, Walgreens plans to open 1,000 major care places at its shops by 2027.
It may be a dangerous technique, however what is sensible about it’s that it’s a logical extension of its pharmacy retail enterprise. Shoppers already go to their neighborhood Walgreens for prescriptions, booster pictures, and day-to-day groceries. Making major care obtainable close by will solely complement its enterprise and provides customers extra purpose to make a extra common journey to its shops in the event that they know they will additionally examine off a visit to the physician’s workplace on the identical time.
Whereas CVS has gotten a lot greater than Walgreens, there generally is a hazard of diversifying an excessive amount of and getting away out of your core competencies and strengths. For value-oriented traders who’re prepared to wager on the underdog, Walgreens makes for a gorgeous contrarian funding. Its fundamentals nonetheless look robust, and that is additionally a prime dividend inventory that pays a yield of 5.2% — 3 times what the S&P 500 averages (1.7%).
Why I might purchase Walgreens as an alternative of CVS
Walgreens’ progress days aren’t over, though some traders could also be unconvinced of that proper now. With a a lot decrease valuation than CVS and a prime dividend yield to associate with some thrilling progress alternatives, Walgreens is the healthcare inventory I might go together with right this moment. However for risk-averse traders, CVS may very well be the higher possibility.
David Jagielski has no place in any of the shares talked about. The Motley Idiot recommends CVS Well being and CVS Well being Company. The Motley Idiot has a disclosure coverage.
