This Drug Store Chain Beats The Rest

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Your corner pharmacy might not seem like a worthwhile investment idea, but what you may be surprised to know is that the stocks of the major drug stores in the United States are on fire. In recent months, investors of stocks such as Rite Aid (NYSE: RAD) and CVS Caremark (NYSE: CVS) have been handsomely rewarded with skyrocketing returns.

Within the drug store industry, there’s one company that leads the rest in terms of consistency of results and level of shareholder friendliness. That company is Walgreen (NYSE: WAG), and dividend growth investors would be wise to consider adding it to their portfolios.

Rising dividends, and the profits to back it up

Very recently, Walgreen announced it had increased its shareholder payout by nearly 15%. Investors are long used to this by now.

Walgreen shareholders have received quarterly dividend payments for 323 consecutive quarters, a streak spanning more than 80 years. In addition, the company has bumped up its distribution to shareholders for a terrific 38 years in a row.

Close competitor CVS also has a solid dividend track record. Earlier this year, the company raised its dividend for the tenth year in a row. CVS provided its investors with a gigantic 38% pay increase. Although an increase of that magnitude is obviously impressive, it’s worth noting CVS’s much shorter history of dividend raises, and the fact that even with the increase, CVS yields just 1.5% at recent prices.

Of course, no company can maintain such an impressive history of shareholder rewards without a proven business model that has demonstrated financial success for years.

Thankfully, Walgreen has just that. The company generated record adjusted earnings in the third quarter of $812 million, a nearly 30% increase year over year. Impressively, Walgreen racked up $1.4 billion in cash flow from operations in the third quarter.

The good news didn’t stop there for Walgreen. The drug store giant posted $5.79 billion in sales in June, representing 2.5% growth year over year.

This is the engine behind Walgreen’s hugely impressive track record of rewarding shareholders, a trend that should continue into the foreseeable future. Walgreen has a valuable brand and is only going to grow its store openings going forward.

Rite Aid is a turnaround play in every sense of the word. After trading under $1 per share as recently as December 2012, the stock has nearly tripled to its current level. There’s a good reason for the stock’s struggles, as Rite Aid had reported massive operating losses for several years in a row.

For example, consider that the company lost $368 million in fiscal 2012. This was actually a marked improvement from the gigantic $2.9 billion net loss in fiscal 2009. Thankfully, Rite Aid finally turned a profit of $0.12 per diluted share last year, which explains the rising share price.

Stable business and dividend track record make Walgreen the best buy

CVS grew revenue and earnings per share by 15% and 18%, respectively, last year. The company also gave investors a huge dividend increase. At the same time, Walgreen has a much longer history of dividend payments and annual dividend raises. Moreover, while CVS’s yield is still appreciably below the yield on the S&P 500 Index, Walgreen pays nearly 2.6% at recent levels.

Rite Aid is an interesting play, but it’s probably best served for investors interested in turnaround stocks. Rite Aid is certainly not your typical blue chip. The stock exhibits much more volatility than its two rivals, indicative of its shaky underlying financial results, and the company does not pay shareholders a dividend.

As a result, investors interested in the reliable growth of an industry leader, along with a demonstrated track record of rewarding shareholders, should consider Walgreen to be the industry leader and look forward to rising profits and dividends for many years to come.

Robert Ciura has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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