The healthcare sector is becoming a popular investment. For a variety of reasons, large national pharmacy brands have become solid investments. This article will examine the current investment climate for pharmacy franchises and what investors can expect in return.
Walgreens Is In A Rebranding Phase
Walgreens Boots Alliance, Inc. has dominated the pharmaceutical industry for decades. Walgreens Boots Alliance, Inc. has changed its corporate strategy recently. The stores operating under the Wallgreens umbrella have been slowly shifting away from the current configuration and into a healthcare-focused niche. This move is a risky one, especially when you consider how many healthcare brands are currently available in the pharmacy industry. To stand out from the crowd, Walgreens’ concept must be unique. Walgreens has a long history of profitability and brand recognition that can lead the way today in an uncertain healthcare environment.
Walgreens Fair Value
A discounted cash flow calculation of 78.42 is a fair value for Walgreens. The price multiples on Walgreens are low. This is much higher than Walgreens’ current value of $43. What does this mean to the 100-year-old company now? It is reasonable to expect low growth rates based on the company’s age. Walgreens’ statistics show that revenues grew by 6.62 percent between 2012 and 2021. Operating income, on the other hand, increased marginally during the same period with a CAGR of 2.02 percent. Net income was consistent over those years. Walgreens has a profitable business, no doubt. Not by much. This franchise is a good investment because of its slow but steady growth.
Walgreens: More on the Walgreens Transformation
Walgreens will sell its wholesale pharmacy, Alliance Healthcare in 2021. AmerisourceBergen purchased it for $6.5 billion. Walgreens’ future was affected by the sale for several reasons.
Reduce Debt
Walgreens has a large debt burden, and the sale of Alliance Healthcare was able to help reduce that. Only about half of the price was used to pay off debts. This brought the total down to $55 billion.
Increased Investment
Walgreens was able to invest $5.2 billion in VillageMD after selling Alliance Healthcare. The company already owned 30 percent of VillageMD, and with the new investment the ownership total grew to 63 percent.
Additional Investment
The sale of Alliance Healthcare made it possible to make another investment in healthcare. Walgreens paid $330 million for a majority stake in CareCentrix. CareCentrix offers a variety of home care products that are compatible with the new Walgreens business model.
Walgreens Dividends Continue To Be Attractive
Dividends are either cash or shares issued to shareholders from company profits. Certain investments are more appealing than others because of this. Walgreens’ dividend program is solid and currently yields 4.40 percent. Although the cash flow of the company has fluctuated over the last decade, it is still possible to pay a high yield dividend. This also means the dividend yield could increase in future. Pharma Property Group can provide you with more information about Walgreens properties for sale.
Why Would You Consider An Investment In A Walgreens Franchise?
Investing in pharmacy properties has many advantages. Three main reasons are lease length, structure of the lease, and location.
Lease Length
In general, pharmacies are good investments because they have long-term leasing. Generally, they last between 20 and 25 year leases. This not only ensures long-term gains for the investor but also offers a layer protection. A long-term rental reduces the risk that a pharmacy will default on its rent and leave the site.
Lease Structure
The franchise investor is responsible for all traditional landlord expenses when using the STNL structure. It includes things like insurance, maintenance and repairs, property taxes, utilities and build-outs. The investor will receive a higher return on their investment.
Location
The location of pharmacies is carefully considered. These properties are located on busy streets, at street corners, near the ends of shopping centers, or in downtown cores. A pharmacy can be located in any high-traffic area. They are usually located in areas that can be easily accessed, such as along mass transit routes.
How the Value of Walgreens is Determined
Two methods are used to determine whether Walgreens was undervalued and its current value. Multiples and discounted cash flows are the two methods. This is an example of how these methods can be applied.
Multiples Method
This method uses the five-year average historical values for both Walgreens, and the healthcare sector. Walgreens spent considerable cash in recent times, adding to their debts but doing so in order to increase future revenues. The classic “spend to make money” approach results in low growth figures on paper, but the move will keep Walgreens relevant for many years to come. Walgreens is undervalued due to its current debt-increasing activity. This makes it a good investment.
Discounted Cash Flow
Discounting future cash flow makes it easier to calculate a fair price for Walgreens. Walgreens’ fair value is $78.42 if you use a cost-of-equity of 11.25 percent and an after tax cost of debt 6.15 percent. This is more than the current share value of $43. Even after factoring in the 30 percent safety margin, the company’s value is still 28 percent below its current share price.
Final Thoughts
Walgreens is a great choice if you’re looking to tap into the trend of pharmacy properties. The company is still a good investment, even though it plans to close 900 locations. Investors can benefit from the company’s current undervaluation. A Walgreens franchise offers a low-maintenance, long-term investment that is in line with the current real-estate trend.
