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Amazon Launches Online Pharmacy; Walgreens' Dividend Outlook Remains Stable For Now

Shares of Walgreens fell nearly 10% on Tuesday following Amazon's introduction of its new online pharmacy service.

Amazon Prime customers can now order prescriptions for home delivery within a couple of days. Amazon stocks most brand name and generic medications, works with most insurance plans, and will have pharmacists available 24/7 by phone.

Besides trying to offer greater convenience, Amazon will make it easier for customers to choose the lowest price option by comparing their insurance co-pay and the price without insurance, after including Amazon Prime's prescription savings benefits.

To get started, Amazon Prime members need to answer a handful of questions about their current medications and health conditions. They can then get their prescription on file with Amazon by contacting their prescriber directly.

Mail-order prescriptions aren't a new concept and represent about 6% of the prescription-drug market, according to data cited by the Wall Street Journal.

But Amazon's official entry has potential to significantly increase that figure in the years ahead as the company leverages its shipping expertise, unique brand, and loyal base of more than 120 million U.S. Amazon Prime members.

If prescription deliveries accelerate, traditional pharmacies could experience steeper declines in high-margin retail sales (beauty product, toiletries, etc.) as foot traffic falls and consumers purchase those goods elsewhere.

Walgreens and its rivals have been busy responding to the threat posed by online shopping with initiatives such as same-day deliveries and order pickup in as little as 30 minutes.

CVS has even begun testing prescription deliveries using self-driving vehicles, and Walgreens has tried out drones that can deliver minutes after being ordered, per the Chicago Tribune.

Walgreens is also accelerating its digital spending to improve engagement with customers, opening doctors' offices in its stores to expand its healthcare services, and taking more costs out of its business to free up cash for omnichannel investments.

It's too soon to say how effective these initiatives will be (Walgreens hopes to return to earnings growth next year), but Amazon faces other formidable rivals in this industry as well.

The three largest pharmacy benefit managers handle nearly 80% of prescriptions and offer their own mail-order services (albeit with somewhat questionable value). These powerful companies will do everything they can to retain control of the market.

Meanwhile, with prescription demand skewed toward the older population, many consumers may be reluctant to try a new online delivery platform rather than continue with their ingrained shopping habits.

The industry's lack of price transparency that Amazon is trying to improve may also work against the adoption of its online platform. Many consumers with insurance are used to being price takers, especially since copay structures are so rigid and straightforward.

That said, Amazon's entry into the world of pharmacy is worth watching given the company's track record of disrupting industries.

Walgreens has continued reporting steady prescription volume growth, but we will keep a close eye on this critical metric in the years ahead.

After all, Walgreens is already battling numerous challenges.

Major sources of pressure include lower reimbursement rates for prescriptions filled in its stores, sluggish retail sales as e-commerce rivals take share, and COVID-related disruption (large cities and tourist areas account for 24% of revenue and have seen foot traffic fall nearly 40%).

Despite these headwinds, Walgreens over the last four quarters still managed to grow its free cash flow by 5.6% to $4.1 billion, easily covering its $1.7 billion of dividend payments.

Unless management believes the company needs to significantly step up its investments or make a large acquisition to protect its long-term future as the industry evolves, Walgreens' solid cash flow should be sufficient to keep the dividend covered.

However, as we said in July, there's a lot more to the story than the dividend. 

Investors have to decide if they believe Walgreens can eventually return its business to growth in the face of various secular pressures. Amazon's entry further clouds the company's long-term outlook. 

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