Walgreens Boots Alliance is one of the first Dividend Aristocrats, which comes to my mind when I think about BREXIT risk. This is because of exposition on UK retail pharmacies and currency issues. Is it really a threat?

First time I looked at company at the beginning of the year (read more), when share price was a little bit above current levels ($85) and I found company rather expensive. My investable level was set at $65 which is way below current market price. Is anything changed and should I raise my investable level?

Business is doing quite well with double digit dynamics.

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But is it a key driver for share price? I do not think so. Some time ago company announced a proposed takeover of Rite Aid (US retail pharmacy chain) for $17.2b. It is a huge takeover both as it comes to nominal value and relatively to market cap of WBA ($85b). This deal will strengthen position on US market. Historically company has a good track record in acquisitions so I am not worried about post acquisition integration. Also net debt to EBITDA after a deal should not be excessive, however suspension of repurchase program is not what long term investors like – but you can’t have everything at once and I prefer this acquisition to buyback.

Coming back to my first question about BREXIT and impact on UK business. Well, people will always buy drugs so I do not expect any changes in consumer demand. I see only some translation effect on financial results as GBP is under pressure. As far as I remember UK is around 50% of Retail Pharmacy International and Retails Pharmacy International is below 15% of total revenues, so even if we assume strong depreciation of company it is not significant in total business.

What’s next?

Well, the main issue is finishing Rite Aid takeover. Other parts of business are expected to well perform as guidance is at $4.35-$4.55.

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From valuation perspective:

EV/EBITDA ~ 10.9

P/E ~ 18.2

Dividend yield ~ 1.8%

Rather neutral valuation but I see some upside due to takeover. On the other hand there is also a regulatory risk for prices of health care products.

 

Summing up, Walgreens Boots Alliance is an awesome long term story, however when I am looking at historical performance I am a little bit afraid of buying shares. I am increasing my investable level to $70, which doesn’t mean that I would close my eyes and buy shares when share price drop to this level.

 

Disclaimer WBA – no position