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RMFP Portfolio Update 2014 - Oct 9

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Manulife Monthly High Income Fund


  • Walgreen, America’s largest drugstore chain, reported a $239 million loss in its fiscal fourth quarter after swallowing a huge accounting charge from its 2012 Alliance Boots acquisition, but the chain’s results still met Wall Street expectations. Walgreen said that it recorded a noncash loss of $866 million in the quarter that ended Aug. 31 because it decided to exercise its option early to buy the remaining stake in Alliance Boots that it did not already own. Over all, Walgreen lost $239 million, or 25 cents a share, in the quarter. That compares with a gain of $657 million, or 69 cents a share, in the same period last year.
  • Adjusted earnings, which exclude the Alliance Boots charge, totaled 74 cents a share, which matched analyst expectations, according to Zacks Investment Research. Walgreen’s revenue rose more than 6 percent, to about $19.1 billion; analysts had expected $19.02 billion.
  • Total comparable sales growth of 5.4% explained the vast majority of total reported revenue growth. Front-end comparable store sales rose by 1.3% driven by a 3.5% increase in the basket size which was offset by a 2.2% fall in traffic. Notably prescription sales rose sharply, being up by 9.3% compared to last year as the number of subscriptions being filled totaled 211 million. In total, prescription sales make up 65.7% of total sales. These sales numbers are simply quite healthy by any metrics.
  • Walgreen's 19% pharmacy retail market share makes it a Goliath in the prescription business, but it also means that the company kicks off substantial shareholder friendly cash. During the fiscal fourth quarter, Walgreen's free cash flow totaled $1.1 billion and its operating cash flow totaled $1.4 billion.   That cash helped the company return $1.28 in dividends to investors during the fiscal year, up from $1.14 a year ago, and increase its quarterly dividend payment by another 7.1% to $0.3375 in August, marking the company's 39th consecutive year of dividend growth.
  • But even after increasing its dividend, Walgreen still has plenty of firepower thanks to an improving balance sheet. Its cash hoard finished the quarter at $2.65 billion, up from $2.1 billion last year, and its long-term debt fell to $3.73 billion from $4.48 billion a year ago.
  • Walgreen estimates that cost savings tied to its Alliance Boots acquisition will reach $650 million in 2015 and that the deal will boost its fiscal first quarter earnings by between $0.10 and $0.11 per share. But it won't have to rely just on growing its global pharmacy footprint for future growth.
  • Walgreen is aggressively growing its in-store healthcare clinic business, too. That business should help it capture more revenue opportunities as it wins patients away from expensive emergency rooms and inconvenient primary care doctors. Clinics should also benefit as newly insured patients under healthcare reform seek out care from everything from sprains to the flu and seniors embrace Walgreen's chronic care programs.
  • Walgreen is a 1.0% weight in the portfolio.