Walgreen stock: A pill that's not hard to swallow
— -- A: When the economy slows, consumers can postpone or eliminate many expenses.
Plan for buying a new flat-screen TV, taking a Hawaiian vacation or even buying a new car can be easily dumped when times are tough. But people have a harder time going without medicine.
If that's true, why are shares of Walgreen down a bruising 36% this year? Should shares of the drug seller be holding up better since they sell necessities? After all, shares of drugmaker Pfizer are down less than 26%, which is better than the 36% loss suffered by the market at large.
The answer is that Walgreen doesn't just sell medicine. While prescription sales accounted for 65% of revenue last year, according to the company's annual report, 35% of sales come from the items in the store that may be more profitable than drugs.
Drugstores make a great deal of their profit from non-essentials, from candy and gum to beach umbrellas. In addition, they sell items like shampoo and cleaning supplies that may be priced more aggressively at big-box retailers like Wal-Mart. And in its most recent earnings report, Walgreen acknowledged consumers are focusing more on value and price.
With this in mind, are shares of Walgreen, selling near 52-week lows, a buy? Could the company's exposure to the relative safe haven of drug sales offer protection from a weak economy? To find out, we'll put the stock through the four steps considered at Ask Matt, including:
Step 1: Risk vs. reward. When you take a risk on a stock, you want to make sure you're properly rewarded. Downloading Walgreen's trading history back to 1980, we see the company generated an average annual compound rate of price appreciation of 16.7%. That's not even including the current dividend yield of 2%. This is a very high return since the S&P 500 posted an 11.6% return in the same time frame, says IFA.com.
But, here's the catch. To get the higher return you accepted higher risk — standard deviation — of 34.5 percentage points. That's much higher than the 14.9 percentage point risk of the S&P 500 during the period. So to get a 44% higher return you accepted 132% higher risk. That's not a great tradeoff and should stop many investors' analysis right there. But for you risk takers out there, keep reading.
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