5 Reasons This Market Leader Is Poised For Impressive Growth

By Michael Vodicka
December 02, 2013

My 62-year old aunt called me in a panic a few weeks ago.

“I’m worried about the market crashing because of the government shutdown.”

Sensing she was just looking for a little reassurance, I proceeded to tell her that I viewed any short-term weakness as a great chance to buy. I explained that not only is the trend still higher in the short run but that in the long run stocks spend a lot more time going up than down.

She conceded that made a lot of sense. But she still wanted to proceed with caution, adding that the only stock she wanted to buy was leading domestic drugstore company CVS, Inc. (NYSE: CVS).

Although she didn’t realize it, my aunt was making a big statement about blue chips.

They make investors feel safe. They’re less volatile than smaller companies. And with the S&P 500 trading at an all-time high, blue chips are in demand from investors looking to curb equity risk.

That’s why I want to share one of my favorite blue chips. Walgreen Co. (NYSE: WAG) is a virtual blueprint of what to look for in a great blue chip. So far, that has fueled a 54% gain in 2013. Take a look at this chart.

And Walgreen hits all the marks for investors looking for a market leader with growth potential.

1. Undisputed Market Leader
Walgreen is an undisputed leader in the domestic retail pharmaceutical industry. The company operates more than 8,500 locations in 50 states, the District of Columbia Puerto Rico and Guam. That impressive reach, scale and size creates huge barriers to entrance for any upstart competition that frequently wreaks havoc on technology companies. High barriers to entrance are an important staple of any great blue chip.

2. Steady Growth
But even though Walgreen is a market leader, the company still has plenty of room to grow. That’s because Walgreen is sitting on an incredible opportunity to expand into international markets. Up until 2012, Walgreen had close to no international exposure. But recognizing the huge opportunity to take its powerful brand and business model into completely untapped international markets, management executed the biggest acquisition in company history, paying $6.7 billion for a 45% stake in European pharmacy retailer Alliance Boots GmbH. 

The merger remains on track to have the two companies operating as one by 2015. Management expects operational synergies to reduce overall costs by more than $1 billion by 2016 while revenue is expected to top $130 billion. The combination of dominating the U.S. market while expanding into international markets should provide steady growth for years to come. And those are the kinds of consistent returns blue chip investors are looking for.

3. Strong Financials
Great blue chips are built on financial strength and good credit. Walgreen is able to execute multi-billion dollar acquisitions because of its incredible financial power. As of the last quarter, the company had $2.9 billion in cash and equivalents, up almost 50% from just last year and $4.5 billion in long-term debt. With a debt-to-cap ratio of just 20%, that leaves the company more room to increase operating leverage and grow organically and through additional acquisitions

4. Shareholder Friendly
Walgreen is also using its financial strength to directly reward its shareholders through dividends and share buybacks. In 2011, Walgreen approved a $2 billion share buyback that has yet to be tapped. And just last quarter, Walgreen raised its dividend by 15%. That recent hike is in line with company’s goal to carry a 30%-35% dividend payout ratio, supporting a dividend yield of 2.3%. These are exactly the kinds of shareholder-friendly companies that are a great fit for blue chip investors

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5. Valuation
Unlike overvalued glamour stocks like Tesla Motors, Inc. (NASDAQ: TSLA) and Facebook, Inc. (NASDAQ: FB), blue chips trade with sustainable valuations that increase the probability investors will see long-term gains. And Walgreen definitely fits the bill. In spite of the company’s impressive 54% gain in 2013, shares trade with a forward P/ E (price-to-earnings) ratio of 16 times, directly in line with its 10-year average and below its peer average of 19. That normalized valuation will help additional earnings growth support shares, another factor supporting the steady gains blue chips are known for.

Risks to Consider: Walgreen is facing intense competition in domestic markets from CVS, Inc. and Wal-Mart (NYSE: WMT). Although the company is smartly diversifying into international markets, intense domestic competition will weigh on margins.

Action to Take --> Walgreen is a great fit for blue chip investors looking for a unique combination of growth and stability. Shares are currently trading at an all-time high but still look reasonably valued in light of projected growth rates. That makes Walgreens a buy anywhere below $60.

P.S. -- Investing doesn't have to be complicated. Invest in simple businesses that dominate their industries and return billions of dollars to their investors through dividends and buybacks. It works. In fact, the stocks in our latest report, the Top 10 Stocks For 2014, have gained 129.5% on average over the past five years following this simple strategy. To learn more about our top picks for 2014 -- including several names and ticker symbols -- follow this link.