Yesterday, Walgreen Co. (WAG) announced a new $2 billion share repurchase program which will expire at the end of 2013. Earlier, in January 2007 the company had initiated a $1 billion share buyback program, of which approximately $655 million is left. The new plan, replacing the 2007 share repurchase program, is a part of a new capital policy which aims to reward the company’s shareholders.

Since 2004, Walgreen’s has repurchased more than $1.3 billion of common stock. In addition, the company declared a quarterly dividend of 13.75 cents per share, a 22.2% increase from the year-ago dividend. The company also set a long-term dividend payout target in a range of 30–35% of net earnings.

Walgreen’s strong balance sheet has enabled it to announce such a huge share buyback program. Cash flow from operations during fiscal 2009 was $4.1 billion, representing a 35% increase compared to the previous period. Additionally, during fiscal 2009, free cash flow increased almost 168% to $2.2 billion. At the end of the fourth quarter, Walgreen had $2.1 billion in cash and cash equivalents.

The company has scaled down its plan of opening stores from the current level of 9% to 4.5% – 5% in 2010 and 2.5% – 3% in fiscal 2011 to make best use of the available funds. This is evident from the decline in opening of new stores during the fourth quarter. During the quarter, the company opened 149 new drugstores compared with 162 in the third quarter and 199 in the year-ago quarter. We believe this decision will benefit Walgreen’s, as new stores take 2-3 years to become profitable.

The current economic scenario is a major challenge that we expect Walgreen to withstand based on its strong cash balance and vast network of retail stores. The current US government’s agenda of reforming the healthcare system will affect the company on its margin and reimbursement front. However, the inclusion of about 47 million uninsured people under the insurance net will increase the prescription volume manifold, which should help boost the top line. We have a Neutral rating on the stock.
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