Walgreens Boots Alliance(NASDAQ: WBA) and CareTrust REIT(NYSE: CTRE) combine everything you want in a dividend stock: yields above 5% but with a safe payout ratio and a history of dividend and revenue growth.
Both healthcare companies, however, have faced recent difficulties. Looking at the overall strengths of each, I believe there is an opportunity to get in on these stocks at a relatively low price, locking in a high-yielding dividend in the process.
Walgreens looks like a contrarian buy
Walgreens Boots Alliance employs more than 315,000 people across 13,000 locations in nine countries. The company operates as a healthcare, retail, and pharmacy company, and so far this year, its stock is down more than 10%.
The reasons for the stock's fall are obvious. Last week, California Governor Gavin Newsom said the state would not do business with the company because of its decision not to distribute abortion pill mifepristone in 20 states. That move came after attorneys general in those states threatened legal action. Newsom's office told the Los Angeles Daily News that the state's Department of General Services had paid Walgreens $54 million over the past eight years. There also has been talk of a potential boycott against the company.
The other matter dragging down the stock was the settlement of opioid lawsuits by Walgreens. In its first quarter report for fiscal 2023, the company said it had paid out $6.5 billion in a pre-tax charge regarding opioid litigation and other opioid-related matters.
The drop in Walgreens' shares presents an opportunity for investors to buy a stock on the dip with an above-average dividend and a long history of growth. The company's revenue has increased by 84% over the past 10 years, while its earnings per share (EPS) are up nearly 88% in that period.
Despite the negative news, Walgreens expects a strong second half from retail pharmacy sales, and it has issued guidance for full-year EPS of $4.45 to $4.65, compared to 2022 EPS of $2.57. Once the negative news passes, the stock will likely rise as it is undervalued, trading at roughly 8 times earnings and a price-to-sales ratio of 0.217.
Over the past two years, the company has increased its digital sales. It also has boosted its healthcare business through its majority stake in VillageMD. It has more than 200 VillageMD clinics located at Walgreens, and the plan is to open 1,000 by the end of 2027.
Those efforts are paying off. In the first quarter, the company's U.S. healthcare segment's sales totaled $989 million, up $938 million over the same period last year. On a pro forma basis, the segment's businesses were up 38.4%.
The company raised its quarterly dividend last year by 5% to $0.48 per share, the 47th consecutive year it has increased its dividend. At the stock's current price, the yield is around 5.76%. If the company's EPS forecast is correct, the annual payout ratio will be around 42%, leaving room for continued dividend growth.
WBA Revenue (Annual) data by YCharts.
CareTrust stands out among senior-living REITs
CareTrust REIT is a real estate investment trust (REIT) that specializes in senior housing and healthcare-related properties. Its shares are flat so far this year and down more than 3% over the past three months.
It operates 204 properties across 23 states, with 19 tenants. The interest rate hikes made business difficult last year for REITs because it was tougher for them to get the financing to expand. It also made REITs less attractive to investors because there are more high-yielding possibilities.
The company just reported fourth-quarter and full-year numbers on Feb. 10. Revenue for the quarter totaled $49.7 million, up 4%, year over year, while annual revenue came in at $196.1 million, up 1.9%.
The company's quarterly normalized funds from operation (FFO) were down 0.07% in the quarter, to $37.1 million, and normalized FFO per share was $0.38 compared to $0.39 in the same period last year. However, annual normalized FFO was reported as $144.5 million, up 0.04%, and full-year normalized FFO per share was the same at $1.49. Over the past 10 years, CareTrust has increased annual revenue by 284% and annual FFO by 85%.
Since it became a publicly traded company in 2014, CareTrust has raised its quarterly dividend every year, including a 3.7% boost last year to $0.275 per share, which works out to a yield of roughly 5.8%. The company is expected to announce another dividend increase sometime this month. The dividend's normalized FFO payout ratio as of the last quarter was 69%, safer than a typical REIT's.
CTRE Revenue (Annual) data by YCharts.
The company's diversification isn't as strong as it could be because its top tenant, The Ensign Group, is responsible for 36% of its total rent. However, Ensign's financial health appears strong with a compound annual growth rate (CAGR) of 15% in annual revenue over the past eight years and a 16% CAGR in its adjusted EBITDAR (net income before interest expense, income tax, depreciation, amortization, and cash rent, after a management fee of 5% of facility operating revenues) in that same period.
While interest rate increases make it harder for CareTrust to expand -- and is a challenge as well for its tenants -- the company has plenty of long-term tailwinds in its favor. The aging of our population has increased the need for senior living and assisted nursing facilities, and the company has come through the pandemic well, with a relatively high rate of 95.5% of contractual rents collected in the past quarter. The company's tenants are also starting to see occupancy rates get closer to the pre-COVID-19 levels of 78% to 81%.
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Jim Halley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
