Better Dividend Stock: CVS Health vs. Walgreen

Source: CVS Health.

Investors interested in buying dividend-friendly healthcare stocks for their long-haul portfolios might want to keep retail pharmacy chains CVS Health and Walgreens Boots Alliance in mind.

Both companies are enjoying sales growth tailwinds tied to aging baby boomers and health insurance reform and both companies are industry giants, but one of these companies may be a better bet for dividend-hungry investors. Read on to learn which of these two stocks I think is a better buy.

Dividend upside?Neither of these two pharmacy Goliaths offers a high dividend yield, but both remain committed to dividend growth.

After a 19% move higher in its stock this year, CVS Health's forward dividend yield has fallen to 1.3% and similarly, a 27.8% jump in Walgreen's share price has reduced its forward dividend yield to 1.5%.

Those dividend yields aren't going to put these two companies among the best yielding plays in healthcare, but investors ought to keep in mind that both companies' annual dividend payouts are likely to climb, rather than stagnate, over the coming years.

Since 2000, CVS Health's quarterly dividend payout has grown from $0.0575 per share to $0.35 per share and Walgreen's dividend payout has increased from $0.0337 per share to $0.36 per share. That kind of commitment to returning money to investors translates into CVS Health's and Walgreen's delivering average annual dividend increases over the past 10 years of 24.4% and 22.2%, respectively. Because CVS Health's and Walgreen's dividend payout ratios are 28.7% and 34.7%, respectively, there should be plenty of room for both companies to increase their dividend payout in the future.

Source: Walgreens Boots Alliance.

Rock-solid financialsCVS Health's and Walgreen's laser focus on building profit-friendly purchasing power via acquisitions has allowed each of them to grow net income and maintain bulletproof balance sheets.

Over the past decade, CVS Health has transformed itself from a retail pharmacy player into a U.S. drug market powerhouse, first through its acquisition of the pharmacy benefit manager Caremark, which manages drug programs for health insurers and employers, and most recently with its agreements to buy specialty drug distributor Omnicare and Target's retail pharmacy business.

Meanwhile, Walgreen's spending spree includes last year's high-profile acquisition of the Switzerland-based Alliance Boots, which established Walgreen's as a global retail pharmacy leader.

Overall, deals have helped CVS Health's total revenue grow from $96.4 billion in 2010 to $143 billion over the past 12 months, while Walgreen's sales have increased from $67.4 billion to $94 billion in the same period. Over that time, CVS Health's operating margin has remained little changed, slipping from 6.4% to 6.2% while Walgreen's has stayed unchanged at 5.1%.

In both cases, CVS Health and Walgreen have largely sidestepped potential margin hiccups tied to financing and integrating large acquisitions, which has allowed them to keep profit ratios stable enough to fuel significant bottom-line growth that has strengthened their balance sheet. Since 2008, CVS Health's net income has expanded from $3.4 billion to $4.7 billion, while Walgreen's net income has grown from $2.09 billion to $3.97 billion.

Debating valuationIf there's any reason not to buy either of these two stocks right now, it's because their valuation has gotten pretty high relative to historical levels.

Over the past five years, CVS Health's price-to-earnings ratio has averaged 16.3, but it stands at 27.7 currently. On a forward basis, CVS Health's P/E ratio is a bit better at 19.2, but that's still north of the S&P 500's 18.3 ratio. Similarly, CVS Health's price to sales is pretty sky-high at 0.9 -- a 10-year high.

Walgreen's valuation situation is similar. The company's five-year average P/E ratio is 18, but it's currently trading at 24.8 times earnings and its forward P/E is 21.4, which is higher than both CVS Health and the broader market. Also, the company's price to sales has more than doubled from a low of 0.4 in 2011 to 1.

Looking forwardThere's little question in my mind that these two companies have staying power that makes them worthy of long-term portfolios. However, I am hesitant to buy either of these companies because significant rallies in the past year have made them arguably pricey, while also pushing dividend yields below the S&P 500.

Because of their arguably extended valuation, both CVS Health's and Walgreen's share prices could flatten out until earnings bring valuation back in line with historical levels. Having said that, I think CVS Health's lower dividend payout ratio and better operating margin make it a better long-term buy than Walgreen's and for that reason, it's the one I'd buy.

The article Better Dividend Stock: CVS Health vs. Walgreen originally appeared on Fool.com.

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned.The Motley Fool recommends CVS Health. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.