Home News Markets Technology Commentary Personal Finance Autos Real Estate
    SAVE   |   EMAIL   |   PRINT   |   RSS  
Walgreen is evergreen
Although many top stocks have stumbled, Walgreen's track record remains superb.
January 14, 2005: 11:31 AM EST
By Michael Sivy, CNN/Money contributing columnist
subscription story
subscription story
A 17-part series on how to achieve maximum returns for the right amount of risk. See all the lessons.

NEW YORK (CNN/Money) - Long-term investors used to look for buy-and-hold stocks. Once you bought them, the theory went, it was safe to hold them as long as you wanted because you'd never actually have to sell.

But many of these so-called one-decision stocks -- from Procter & Gamble to Pfizer -- have stumbled during the past five years.

A handful of stellar growth stocks have stayed on track, however. And while there's no guarantee that they'll remain free from trouble forever, such stocks certainly deserve your attention.

One of the most impressive is Walgreen (Research), which continues to meet its earnings objectives despite some adverse industry trends. The company's prescription-drug business, its chief source of earnings, has continued to grow at a healthy rate. And other successful businesses have contributed to net income and have fattened profit margins.

For the first fiscal quarter, ended Nov. 30., Walgreen earned 31 cents a share (excluding a small non-recurring gain). That's a whopping 30 percent increase over results for the previous year.

These stellar quarterly results surpassed consensus estimates of 29 cents and flummoxed analysts at several large brokerage firms who had downgraded the stock last fall, fearing that the company would fail to meet investors' optimistic expectations.

How does the company do it?

Same-store sales have grown at a steady clip, despite some analysts' concerns that managed care and mail-order prescription drugs would erode Walgreen's growth rate. Instead, the company has more than offset any slack by gaining market share.

The second element of Walgreen's strategy for success is rapid expansion. The company, which has more than 4,680 stores in 44 states and Puerto Rico, is on track to open 450 new stores (net of closures) during the current fiscal year. Walgreen's goal is have 7,000 stores by 2010.

That's a base growth rate of more than 8 percent even before you count the impressive increases in same-store sales, which have ranged over the past few months from 4 percent to 11 percent (vs. year-earlier levels).

In addition, Walgreen is investing steadily in ancillary businesses, most notably its digital photo-processing service, which encourages store traffic as well as adding a profit center. The company is also converting some stores to 24-hour operation.

Overall, profits have grown at a 14 percent compound annual rate over the past five years, and are projected to rise at a slightly faster rate over the coming five years. The stock pays a small 0.5 percent yield.

Walgreen has always been an expensive stock. The share price is near a three-year high, trading at nearly 27 times earnings. Nonetheless, such first-class growth shares have an important place in a long-term portfolio.

If your goal is only to match the market, you could buy an S&P 500 index fund and hold your costs to a minimum without giving up much capital gains potential. For a long-term stock portfolio to make sense, you need to include some shares that can turn in earnings growth higher than that of the average company.

Walgreen is just such a growth stock -- not only have earnings gains been superior, they have been remarkably consistent.

Of course, even top performers can stumble, so be sure to include conservative stocks with above-average dividends in your well-balanced portfolio. That way, you'll hold your risk to a minimum and still have a shot at market-beating returns.

Michael Sivy is an editor-at-large for MONEY magazine. Click here to receive Sivy on Stocks via e-mail every Monday.  Top of page


Follow the news that matters to you. Create your own alert to be notified on topics you're interested in.

Or, visit Popular Alerts for suggestions.
Manage alerts | What is this?