By Malcolm Berko
Dear Mr. Berko:
What do you think of Walgreen Co. stock as a long-term buy for my IRA? My broker, who is a good friend and who really likes your column said that Walgreens was founded by Walter Green, which is how the name (Walgreen) came to be, and says his first drugstore was in Chicago. I think he’s wrong on both accounts — I think the first drugstore was in Galesburg, Ill. We bet a lunch on your answer if you have one.
G.L., Springfield, Ill.
Dear G.L.:
Charlie R. Walgreen got his start as an errand boy for a Galesburg, Ill., drugstore (just up the road a piece from Springfield) and was fired for refusing to shovel snow from the sidewalk. But that didn’t stop him. He bought his first drugstore in 1902 at the age of 29, opened his second store a few years later and by 1916, he owned nine drugstores in Chicago under the name of Walgreens. His stores prospered during the Depression, and it’s worth noting that Hubert Humphrey was one of his first franchisees.
So yes, you’re right as sunshine, Walgreen opened his first store in Illinois, but not in Galesburg; rather, Chicago. And his family name was originally Olofsson, which his dad legally changed for business reasons. There may be a Walter Green in the drugstore business, but there was never a Walter Green who founded Walgreen Co. You win and you lose. And tell your broker I said hello. We had lunch together a few years ago.
And I like Walgreen Co. (WAG – $32.18). WAG reported record profits for the 2009 fiscal year on higher revenues with 9 percent fewer employees than the prior year. This presages an interesting trend in the labor market and suggests that many corporations, including municipal, state, and federal governments, can reduce employment 10 percent to 20 percent and never miss a beat. It’s a common observation that productivity per employee varies inversely with the number of employees on the payroll. And the recession has taught employers that they can produce the same or better results with a smaller work force. Parkinson’s principle that “work expands to fill the time available” suggests Berko’s corollary that “workers become more productive as their numbers decrease.”
And WAG is a dandy company, the largest drugstore chain with $63 billion in revenues. Last year, WAG filled 651 million prescriptions, l.78 million prescriptions per day or an average of 255 daily prescriptions for each of its 7,000 locations. WAG filled more prescriptions in 2000 than were written in the entire country of Germany. Pharmacy revenues increased 7.8 percent in 2009 to $42 billion, which accounted for 67 percent of WAG’s total revenues. WAG’s prescription growth was more than twice that of the industry average, and it continues to increase its market share. Last year, WAG was responsible for l8 percent of all retail subscriptions written in the U.S., up from l5.3 percent just five years ago. And in the next five years, WAG wants that number to be 21 percent.
This year, WAG believes it can grow revenues to $67 billion with the help of 300 new stores. Management has had enormous success entering new markets and relocating older stores to new freestanding units, which tend to increase store revenues by 8 percent. Last year was WAG’s 35th consecutive year of record revenues and earnings. And this year, WAG expects margins to expand on increased revenues of higher margin generics, lower inventory markdowns and even lower labor costs.
However WAG’s in-store health clinics continue to hurt profits and probably cost the company .06 cents per share last year. Still, with the recent purchase of New York-based Duane Reade drugstores, WAG expects earning to increase from $2.02 last year to $2.36 in 2010, Lord willing and the creek don’t flood.
WAG is one of those companies most folks should own in a growth portfolio. The dividend, which was recently raised to 0.55 cents, “sphinx,” but the common stock offers a handsome upside potential in a three-to-five-year time frame. And it may be even better if the rumor of a Rite-Aid takeover becomes fact.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate Web site at www.creators.com. © 2010 Creators Syndicate Inc.
