CVS or Walgreens: Which Is the Better Dividend Stock?

The healthcare retail industry is dominated by two companies: CVS Health Corp. and Walgreens Boots Alliance, Inc. . These two battle head-to-head in pharmacy retail, while they have also broadened their business models in recent years. Both companies face a significant threat in the form of online retail giant Amazon.com, Inc. , and they have taken slightly different approaches to retaining their competitive advantages. As potential investments, the two stocks share a number of similarities. They are both highly profitable companies that return cash to shareholders through dividends. CVS has an attractive 3.5% yield, while Walgreens has a lower yield, but a phenomenal track record of dividend growth. Walgreens is a Dividend Aristocrat, having increased its dividend for over 40 years in a row. Therefore, while the two companies seem very similar on the surface, CVS and Walgreens are different stocks for different types of investors. Taking Different Paths Both companies are giants in their core industry. CVS is an integrated healthcare services provider that operates more than 9,700 retail locations and 1,100 medical clinics, and a pharmacy benefits management business as well. Meanwhile, Walgreens is the largest retail pharmacy in both the United States and Europe. Through its flagship Walgreens business and other business ventures (including equity investments), Walgreens has a presence in more than 25 countries and employs more than 415,000 people. In its leading retail pharmacy business, Walgreens operates approximately 18,500 stores in 11 countries. CVS reported fourth quarter and full-year results on Feb. 20. The company's adjusted EPS totaled $2.14, topping estimates by $0.05 and growing 11.5% from the previous year. For the year, adjusted EPS grew 19% to $7.08. Revenue improved 12.5% to $54.4 billion. Revenue increased 5.3% year over year. Pharmacy services increased 2.2% for the quarter and 2.7% for the year as higher claim volumes were partially offset by pricing pressure. However, CVS gave relatively disappointing guidance for the upcoming year. CVS expects adjusted EPS in a range of $6.68 to $6.88, which would represent a 3% to 6% decline from 2018. Walgreens has also generated strong growth in recent quarters. In fiscal 2018, Walgreens reported 11% sales growth and 18% adjusted EPS growth. Walgreens' strong performance continued in the fiscal 2019 first quarter, including 10% sales growth and 15% adjusted EPS growth for the quarter. Growth was due to a 14.4% higher prescription volumes from the acquisition of Rite Aid stores. Walgreens reiterated its guidance of 7% to 12% growth in fiscal 2019 in adjusted EPS at constant currency rates. Still, the pharmacy retail space is under pressure from the ever-present threat of Amazon entering the healthcare industry. Indeed, Amazon's $1 billion acquisition of PillPack last year seemed to be a precursor to a big move into healthcare. This has caused investor sentiment to erode for the major brick-and-mortar store operators like CVS and Walgreens. In response, CVS and Walgreens have invested in different areas to fuel future growth. CVS has focused on its pharmacy benefits management business, which now has more than 90 million plan members. CVS also made a huge move into new services with the $66 billion acquisition of Aetna in late 2017. Aetna is one of the largest health benefits providers in the U.S., with more than 44 million members at the time the acquisition was announced. Walgreens has not undertaken such a large acquisition in an adjacent business segment. Instead, it has re-invested in stores, primarily through acquisitions. For example, Walgreens acquired 1,932 Rite Aid stores, three distribution centers and related inventory, for $4.4 billion last year. Staying away from a massive acquisition has kept Walgreens' balance sheet strong, and its ability to raise its dividend intact. Dividend Analysis: Yield or Growth? The Aetna acquisition broadened CVS's product and service offerings, but it also saddled the company with a great deal of debt to finance the acquisition. CVS ended 2018 with $71.44 billion of long-term debt on its balance sheet, up from $22.18 billion at the end of 2017. That stretched the company's leverage ratio to over 4.5x, well beyond its target ratio of 3.0x. As a result, CVS has held its dividend steady, not providing an increase in over two years while it deleverages. The stock price has also declined, from over $70 at the time of the Aetna merger to its current level of $57. The one potential bright spot is that CVS's falling share price has elevated its dividend yield to 3.5%, which is significantly higher than the 2% average yield of the S&P 500 Index. This makes CVS an attractive choice for income investors. However, CVS is less appealing for dividend growth. The company is keeping its dividend flat while it reduces its leverage ratio back to its target level. CVS repaid $3.25 billion in debt in the fourth quarter. With so much debt incurred to finance the Aetna acquisition, and expectations for declining EPS in 2019, it could realistically take another two or three years before CVS increases its dividend. While Walgreens has a lower dividend yield of 2.8%, it makes up for this with consistent dividend growth. Walgreens is a Dividend Aristocrat, as the company has increased its dividend for 43 consecutive years. It has a fairly low dividend payout ratio of 28% expected for fiscal 2019, which gives the company the ability to raise its dividend at a high rate. Last year, Walgreens lifted its quarterly dividend by 10%. Final Thoughts CVS and Walgreens are profitable companies with competitive advantages and a positive growth outlook. While they share similar business models, they are taking starkly different approaches to fending off Amazon and the threat of e-commerce retailers. It is likely that CVS and Walgreens can both succeed. The fact that CVS took on such an enormous acquisition means investors will have to be patient for future dividend increases, although the blow is softened by a higher current yield. As a result, investors looking for more income today should favor CVS, while dividend growth investors should prefer Walgreens. (CVS and Amazon are holdings in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells these stocks? Learn more now.) Will You Have Enough Money to Retire? Want to learn about retirement planning from some of the nation's top experts? Join TheStreet's Robert Mr. Retirement Powell live in New York on April 6 for our Retirement Strategies Symposium. For a limited time, tickets are available for $99 for this full-day event. Check out the agenda, learn about the speakers and sign up here.

CVS or Walgreens: Which Is the Better Dividend Stock?

While the two companies seem very similar on the surface, CVS and Walgreens are different stocks for different types of investors.

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