Many investors turn to Benjamin Graham's so-called “Graham number” to calculate the fair price of a stock. The Graham number is √(22.5 * earnings per share * book value per share), which for Walgreens Boots Alliance gives us a fair price of $35.72. In comparison, the stock’s market price is $34.87 per share. Walgreens Boots Alliance’s current market price is -2.4% below its Graham number, which implies that there is upside potential -- even for a conservative investors who require a significant margin of safety.
The Graham number is often used in isolation, but in fact it is only one part of a check list for choosing defensive stocks that he laid out in Chapter 14 of The Intelligent Investor. The analysis requires us to look at the following fundamentals of Walgreens Boots Alliance:
Sales Revenue Should Be No Less Than $500 million
For Walgreens Boots Alliance, average sales revenue over the last 4 years has been $135,403,750,000, so in the context of the Graham analysis the stock has impressive sales revenue. Originally the threshold was $100 million, but since the book was published in the 1970s it's necessary to adjust the figure for inflation.
Current Assets Should Be at Least Twice Current Liabilities
We calculate Walgreens Boots Alliance's current ratio by dividing its total current assets of $16,902,000,000 by its total current liabilities of $22,583,000,000. Current assets refer to company assets that can be transferred into cash within one year, such as accounts receivable, inventory, and liquid financial instruments. Current liabilities, on the other hand, refer to those that will come due within one year. Walgreens Boots Alliance’s current liabilities are actually greater than its current assets, since its current ratio is only 0.7.
The Company’s Long-term Debt Should Not Exceed its Net Current Assets
This means that its ratio of debt to net current assets should be 1 or less. Since Walgreens Boots Alliance’s debt ratio is -1.9, the company has negative current asset / liability balance. We calculate Walgreens Boots Alliance’s debt to net current assets ratio by dividing its total long term of debt of $10,616,000,000 by its current assets minus total current liabilities.
The Stock Should Have a Positive Level of Retained Earnings Over Several Years
Walgreens Boots Alliance had positive retained earnings from 2014 to 2022, during which time they averaged $35,736,750,000. Retained earnings are the sum of the current and previous reporting periods' net asset amounts, minus all dividend payments. It's a similar metric to free cash flow, with the difference that retained earnings are accounted for on an accrual basis.
There Should Be a Record of Uninterrupted Dividend Payments Over the Last 20 Years
Walgreens Boots Alliance has offered a regular dividend since at least 2013. The company has returned an average dividend yield of 3.7% over the last five years.
A Minimum Increase of at Least One-third in Earnings per Share (EPS) Over the Past 10 Years
Walgreens Boots Alliance's earnings per share growth will be calculated using the average EPS of the years 2013, 2014, and 2015, and the average of the years 2020, 2021, and 2022. For the years starting in 2013, we have EPS values of $0.75, $0.89, and $1.01, which give us an average of $0.88. From 2020 to the present, we have EPS values of $-0.36, $4.13, and $-0.48, which average out to $1.10. The growth rate between the two averages is 25.0%, which falls short of Graham's 30% requirement while remaining positive.
Walgreens Boots Alliance satisfies some of the criteria Benjamin Graham used for identifying for an undervalued stock because in addition to trading around its fair value, it has:
- impressive sales revenue
- a worrying current ratio
- negative current asset / liability balance
- positive retained earnings from 2014 to 2022
- a solid record of dividends
- growing earnings per share
