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Better Buy: Walgreens Boots Alliance vs. CVS Health

Brian Feroldi, The Motley Fool

Walgreens Boots Alliance (NASDAQ: WBA) and CVS Health (NYSE: CVS) have a lot in common. They are both significant players in the retail pharmacy industry. Each produces billions in profits each year and shares the spoils with investors. Both of them are also currently facing challenges that have them trading on the cheap.

Which stock is the better buy today? Let's see how they compare in a few key areas to find out.

Pen marking an X in a checkbox.

Image source: Getty Images.

Growth

Walgreens is one of the largest pharmaceutical wholesalers, retailers, and distributors in both the U.S. and Europe. With the population aging in these regions, you might assume that Walgreens' business is booming. Unfortunately, that's not the case at all.

Walgreens has been dealing with a number of headwinds that are challenging its growth. This includes lower reimbursement rates from payers, falling prices on generic drugs, changing consumer preferences, and the recent entry of Amazon.com into the industry. These factors are causing Walgreens' revenue and profits to head in opposite directions . Management also recently admitted that it won't be able to meet its earnings guidance for 2019 .

Management is facing these challenges head-on by closing underperforming stores, striking up new partnerships , and slashing its annual costs (the current goal is $1.5 billion by 2022 ). When combined with the recent acquisition of 1,900 stores from Rite Aid , there are reasons for investors to be optimistic that profit growth can return.

Wall Street currently predicts that Walgreens' profits will grow around 5.1% annually over the next five years. That's not too shabby given the headwinds.

CVS Health is in a similar situation. The biggest growth driver ahead of the company right now is its recent $70 billion acquisition of the health insurer Aetna . The buyout was driven in part to help diversify CVS's business away from its dependence on pharmacies, which are struggling from the same issues that face Walgreens. CVS is also building out its network of in-store clinics (called Minute Clinics), which help to give shoppers another reason to visit the store and protect the company from online competitors.

Management has also promised that the Aetna megabuyout will lead to huge cost savings down the road. The company is targeting more than $750 million in savings by next year.

Add it all up, and market watchers currently project that CVS's profits will grow about 5.8% annually moving forward. That's not all that much higher than Walgreens' projected growth rate, but it is enough to give it the edge here.

Winner: CVS Health

Value

Both Walgreens and CVS Health have badly underperformed the S&P 500 over the past five years. That long-term underperformance has pulled these companies' valuations down to levels that they haven't seen in years.

Take a look at these valuation metrics to see what I mean:

Company P/S Ratio Trailing P/E Ratio Forward P/E Ratio
CVS Health 0.33 N/A 7.4
Walgreens Boots Alliance 0.35 9.9 8.7

Table source: Yahoo! finance.

There's a strong argument to be made that both of these companies are dirt cheap. However, the numbers suggest that CVS Health is a better value right now.

Winner: CVS Health

Giving cash to shareholders

Walgreens and CVS Health cranked out billions in profits each year and have a history of sharing the wealth with investors. Both companies lean heavily on stock buybacks and dividends to do so.

Let's look at stock buybacks first. Both companies have spent lavishly on share repurchase programs over the past decade. That has helped to consistently lower their share counts.

However, a lot of the benefits from buying back the stock were later offset by these companies' decision to issue stock later on to help fund acquisitions. As a result, their share counts haven't always headed down:

WBA Average Diluted Shares Outstanding (Quarterly) Chart

WBA Average Diluted Shares Outstanding (Quarterly) data by YCharts .

CVS Health's share count jumped recently as a result of the Aetna buyout, but it has been much more consistent with reducing its share count in recent history than Walgreens has.

As for the dividend, both companies have been putting money into their shareholders' pockets for decades.

Here are a few key numbers that compare these two companies' dividends at the moment:

Company Yield Payout Ratio 5-Year Dividend Growth
CVS Health 3.7% 28% 82%
Walgreens Boots Alliance 3.3% 33% 40%

Data source: Yahoo! finance, YCharts.

With a most consistent buyback program, a higher dividend yield, a lower payout ratio, and a higher five-year dividend growth rate, I think that CVS Health is the clear winner in this category, too.

Winner: CVS Health

The better buy

CVS Health cleaned up in all three categories, so I think it is the better choice in this matchup. However, I must admit that neither of these businesses interests me all that much right now. I'm not a big fan of investing in companies that are heavily dependent on acquisitions to drive growth. I also do not like the fact that Amazon.com has taken such an interest in the pharmacy industry.

Value investors might do just fine with either of these stocks today, but my personal plan is to focus my capital on companies with better organic growth prospects .

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Brian Feroldi has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy .