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As an investor, discuss which company you would choose to invest in and provide a rationale for your decision. Support your conclusions, why or why not?
I would choose to invest in CVS. First, the company is trading a lower multiple to earnings than Walgreen which indicates that the investor is obtaining more value per dollar of earnings relative to Walgreens. This is particularly attractive in a low interest rate environment in which many stocks trade at a historically high P/E multiple. This many also cause some concern for me as even during a bull market, both CVS and Walgreens are trading a relatively low multiples. This could potentially indicate problems with the overall operations for both businesses as the market is may be capitalizing lower future earners for both businesses. CVS has a lower dividend payout ratio relative to Walgreens. This indicates more security for investors as to the ability to pay future dividend. Likewise, the company is able to retain a greater portion of earnings within the business to better position its balance sheet in the form of cash, or to reinvest back into the business. Walgreens however, paid out nearly 3 times its earning in the form of dividends which is unsustainable. It appears the at Walgreens suffered adverse business operations during COVID-19 and thus was reluctant to reduce its dividend as investor could potentially see the decline as a lack of confidence for the future. As such, the company has maintained the dividend, in hopes of a business recovery...…prices. Business with sustainable competition advantages (Apple, Costco, Nike, UPS, etc.) can earn high returns as it is very difficult to compete. In the case of Walgreens and CVS, is very difficult, but not impossible to replicate their distribution networks. As a result, both companies can operate at scale with relative low costs. However, they are not a low-cost producer. During COVID-19 we saw consumers shift to Wal-Mart, Costco, and online fulfilment to mitigate the impacts of job loss. As a result, business operations for both Walgreen and CVS suffered. In this instance, I would want to see I the competitive positions of both franchises changed in a material way that would ultimately impact returns and earnings on the business (Bennett, 2006).
Appendix Financial Ratios
Ratio
Walgreens
CVS
Current Ratio
0.84
0.91
Return on Assets
6.30%
4.20%
Return on Equity
14%
14%
Debt…
References
1. Bennett, James A., and Richard W. Sias. 2006. “Why Company-Specific Risk Changes over Time.” Financial Analysts Journal, vol. 62, no. 5 (September/October): 89–100
2. Boudreaux, Kenneth J. and Long, Hugh W. The basic theory of corporate finance. Englewood Cliffs, Prentice-Hall, 1977
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