The Money Tree

Safely Generating Income in Retirement

New Trade – WAG

Posted by mounddweller on January 14, 2012

Fellow Traders,

On Friday, I executed a new NP trade in one of my ‘dividend superstars’, Walgreen’s (WAG).   Walgreen Co., together with its subsidiaries, operates a chain of drugstores in the United States. It sells prescription and non-prescription drugs; and general merchandise, which include household products, convenience and fresh foods, personal care, beauty care, candy, photofinishing products, and seasonal items, as well as home medical equipment, contact lens, vitamins and supplements, and other health and wellness solutions. The company offers its products through drugstores, mail, telephone, and online. It also provides specialty pharmacy services; customers infusion therapy services consisting of administration of intravenous medications for cancer treatments, chronic pain, heart failure, and other infections and disorders; and clinical services, such as laboratory monitoring, medication profile review, nutritional assessments, and patient and caregiver education. In addition, it operates Take Care Clinics to treat patients, give prescriptions, and administer immunizations and other vaccines. As of January 4, 2012, Walgreen Co. operated 7,811 drugstores in 50 states, the District of Columbia, and Puerto Rico. The company was founded in 1901 and is based in Deerfield, Illinois.  It currently pays a quarterly dividend of $0.225 ($0.90 per annum).  At Friday’s closing price of $32.63, it currently yields 2.7%.  Walgreen’s has increased its dividend for 36 consectutive years.

Below you’ll find a plethora of financial information about Walgreen’s.

I want to call attention to several pieces of the information.  First, sales have increased every year for the past 10 years.  Net margin, not untypical in retail operations is thin.  However, it is consistently in the 3.5 – 3.8% range.  It dipped slightly during the recession in 2008/9.  Debt/Equity is very manageable and the P/E ratio is well below its 10 year average.  For traders wanting to accumulate a long-term holding in WAG it is important to point out that its dividend payout ratio is a low 27%.  There is ample room for continued growth in the dividend, even if revenue and net income growth were to stagnate for an extended period of time.

Now let’s take a look at the price chart.  I have chosen to show you the 3 year chart so that you can see what happened to the stock during the financial crisis and thus see what might transpire should the sovereign debt situation in Europe blow-up and send the market into a tail-spin.

During the last crisis, on March 9, WAG bottomed out at $21.39.  More recently, on November 23, it hit a 52-wk low of $30.34.  Its 52-wk high occured last March 15 when it hit $47.11.

So, I’m sure inquiring minds want to know why the stock has sold off in the past several months.  The short answer is two words, Express Scripts.  Express Scripts is a pharmacy benefit manager.  Walgreens previously filled a lot of prescriptions for Express Scripts customers.  However, the two companies were unable to agree on new contract terms before the old contract expired at the end of 2011.  Mr. Market fears Walgreen’s will lose a substantial amount of business in its pharmacy department if they lose Express Script’s customers.  I’m of the opinion they may see a temporary decline but that they will eventually figure out a way to continue growing without the benefit of Express Script’s business.  Walgreen has been in business for over 110 years.  During this time there have been many, many BIG changes in the medical industry.  Walgreen’s has adapted and will adapt again.  This confidence in Walgreen’s long-term viability led me to place the following trade:

STO 4 WAG FEB $30 puts at $0.38.

My ROIC, net of commissions, for this trade is 1.18%.  At Friday’s closing price of $32.63 I have down-side protection of 9.22% with 35 days to expiration.  If my puts are ITM at expiration I can choose to either roll them out to either March or April, or I can except assignment.  If I accept assignment I will own 400 shares of WAG with a net cost of $29.62.  My initial dividend yield would then be 3.04%.

Let me know your thoughts or questions by posting a comment below.



4 Responses to “New Trade – WAG”

  1. Dave said

    Hi Troy…

    This seems like a very decent trade and I like the way you have thought it out… Very well detailed…

    Just a thought, what about the idea of using half-half put selling?

    For example…

    Say you sold 1/2 a position (2 feb 32.00 puts @0.93)… Since your only selling 1/2 position this means you can be a little more agressive with your strike selection. Also, this would give you a cost basis of 32 – 0.93= 31.03…

    If the stock went up, you get to keep your premium (0.93 x 2 x 100 = $186… Thats 2.9% in a little over a month…

    If it goes down, you can wait till the stock hits a lower support with fading momentum and sell half of the other half a position of puts. (That would be 1 contract)

    If the stock went up, you get to keep your premium…

    If it goes down you can wait till the stock hits a lower support again with fading momentum and sell the last half of the other half a position of puts… (That also would be 1 contract)

    This process would enable you to furher lower your cost basis in the case you were assigned shares.

    In a addition, on any shares you were assigned you would sell covered calls on either at areas of resistance or simply at strikes you would be happy to sell the stock at (a strike above your cost basis)

    This actually looking at using this concept for my own trades…

    The whole philosophy is to continually lower the cost basis in order to increase chances of getting out with a profit…

    Thanks Troy


  2. dealmakr said

    Hi Troy,

    On WAG if you look farther out on the chains for Apr & Jul, you can see that the Apr 26 put & the Jul 23 put are priced about where you sold the Feb 30 put.

    To me this implies that the Express Scripts drama has a way to go. With ESRX looking to aquire Medco that could result in more business being lost. Maybe look at the 5 year chart cause if things get weak could go back down to the 25 area. Company has spent a lot of money buying in stock over the last year at much higher prices which are never a sign of good timing when the stock continues to slide. The Ceo has already said that earnings will be impacted.

    I would look farther out and maybe wait a bit until the ESRX drama unfolds a bit more, also watch the next earnings report for clues.


  3. […] If you would like more information about Walgreens, I have written about it before.  You can read it here: […]

  4. […] First, I’d like to tell you about my recent trade in Walgreens (WAG).  Some readers may recall I executed a trade in WAG earlier this year.  You can read more about WAG and that trade here: […]

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