Top Retail Pharmacy Dividend Stocks

| October 13, 2014 | 0 Comments

prescription drugsSometimes, you run into a number that’s simply staggering.  Here’s one of them…

$26.6 million.

Every hour, Americans spend $26.6 million on prescription drugs.

We all know that health care economics are virtually impossible to grasp.  But did you ever imagine the retail market for prescription drugs is this massive?

Remember that national debt clock in New York that real estate developer Seymour Durst put up in 1989?

How about a prescription drug sales clock?

With all the money floating around, a number of companies are competing for the big money in Drugs… Companies like Costco (COST), Wal-Mart (WMT), Kroger (KR), and even Safeway (SWY) are active in the industry.

Despite the increasing competition, it looks like the retail pharmacy industry is (for now) a four horse race…

  • Rite Aid (RAD)
  • Walgreens (WAG)
  • CVS (CVS)
  • And a Dark Horse I’m going to introduce in a moment…

Needless to say, all this money means fat profits for companies… and that attracts Dividend investors like flies to vinegar!

The problem is, some of these stocks are expensive, so you need to tread lightly… before we start spending our hard earned money, let’s take a closer look at each stock.

The first company is easy – Rite Aid (RAD) doesn’t pay stock dividends so we can toss them out the window.

So should you be looking at Walgreens (WAG), the Dividend Aristocrat, or CVS (CVS)?

CVS (CVS) A Top Retail Pharmacy Dividend Stock…

Well… CVS has been paying dividends for six years.  But it’s been on a strong run, up 46% in the past 52 weeks.

We like the firm’s ability to leverage the value of the 5 million plus customers it sees every day by operating America’s largest retail medical clinic.

With a low dividend payout ratio of 24.7%, it can more than afford to pay a higher dividend.

However, one big operating challenge for CVS… protecting margins on prescription drug revenues.

You see, competition is growing… CVS recently charged $150 for a monthly prescription of the generic version of the cholesterol drug Lipitor, while Costco charged $17.

Pressure like that is sure to Impact Margins VERY QUICKLY… and when Margins shrink, profits shrink… and when profits shrink, dividends often get cut!

Compared to others in the industry, CVS is your less expensive choice, with a P/E of 19.9x… But its dividend yield is a paltry 1.35%.

And with a yield that low, the stock looks really expensive…

So what about the other big contender?

Walgreens (WAG) A Top Retail Pharmacy Dividend Stock…

Across the street at Walgreens, we have a different story… As any drug dealer will tell you, you get what you pay for.

Walgreen’s has its own set of challenges.

The big one:  figuring out how much money it can make selling prescriptions under Medicare’s Part D program.

Walgreens has already cut its long-term profit forecast because of lower reimbursement rates and high generic drug costs.

You’ve got to wonder… can Walgreens keep increasing dividends?  Can a company be an Aristocrat and a drug dealer at the same time?

To further complicate things… Walgreens is expensive.

Its P/E ratio of 30.3x is 50% HIGHER than the broad market P/E.

Despite the high price, WAG has been trading off recent 52-week highs, but you’re still paying a lot for another skinny 2.22% yield.

So, What About that Dark Horse Contender?

The Dark Horse Cardinal Health (CAH) Another Top Retail Pharmacy Dividend Stock…

There’s another stock that pays dividends if you’re interested in this $26.6 million an hour business… Cardinal Health, Inc. (CAH).

They own Medicine Shop and Medicap, which have 500 locations… which is not much of a footprint compared to Walgreens’ 8,300 locations and the 7,600 for CVS.

But here’s where it gets interesting.

Cardinal Health is actually two businesses in one, pharmaceutical and medical.

The medical segment markets lab and surgical products to hospitals and doctors.

The pharmaceutical segment distributes both brand name and generic pharmaceuticals, over-the-counter drugs, and other products to retailers.

The two tier business gives the company great reach.

But in August, 2013, Cardinal’s pharma segment took a brutal hit.  It lost one of its two largest customers… Walgreen’s.

Walgreens represented 21% of Cardinal’s 2012 consolidated revenue.  Despite the blow, Cardinal has actually come through this in pretty good shape.

They simply crossed the street and cut a deal with… you guessed it CVS!

The challenge with Cardinal is the dividend yield is low… only 1.8%.  And the stock is trading near 52-week highs.

Which Top Retail Pharmacy Dividend Stock Should You Buy?

Do you really want to do one of these drug deals?

You might get high on Walgreens and CVS hallucinating about how an aging population will swell the lines at the prescription counter.

Or you might drool over the Dark Horse Cardinal who’s growing in a huge industry…

But for dividend investors concerned about yield…. they should just stay straight and, “Just say NO!”

All of these stocks are a rich man’s drug… over-valued, expensive, and poorly positioned right now to protect dividend investors from a choppy market.

Walgreens (WAG)

Dividend Yield:  2.22%
Annual Payout:  1.35
Payout Ratio:  37.5%

CVS Caremark (CVS)

Dividend Yield:  1.35%
Annual Payout:  1.10
Payout Ratio:  24.7%

Cardinal Health (CAH)

Dividend Yield: 1.8%
Annual Payout: 1.37
Payout Ratio:  32.2%

 

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Category: Dividend Yield

About the Author ()

Michael Jennings writes and edits DividendStocksResearch.com showing how you can profit from dividend stocks. His passion for stocks and especially Dividend Stocks began at an early age. Now he shares his knowledge and wisdom with anyone who asks... He shows beginning investors, retirees, and even trading pros how to create regular income by investing in dividend stocks, easily, step-by-step! You can Sign up for his free Dividend reports and dividend newsletter at http://www.dividendstocksresearch.com/free-sign-up

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