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In an effort to boost shareholders’ wealth, Walgreen Co. (WAG - Analyst Report) recently announced a 14.5% hike in its quarterly dividend. The drug retailer will now pay a dividend of 31.5 cents per share, higher than the earlier rate of 27.5 cents per share.

Subsequent to the dividend hike, the annual dividend rose to $1.26 from $1.10 earlier. The increased dividend will be paid on Sep 12, 2013 to stockholders of record on Aug 20.

The news sparked investor optimism as the stock price alleviated 3.01% (or $1.40) on the day of the announcement. The company’s dividend yield improved to 2.6% following the dividend hike. The current dividend payout ratio hovers over 37% for Walgreens.

The recent dividend raise is in line with the company’s strategy to maintain long-term dividend payout ratio of 30%-35%. The hike reflects a compound annual growth rate (CAGR) of about 23% for dividends over the last 5 years.

It is encouraging to note that the company has been paying dividends for more than 80 years and the recent hike marks the 38th successive year of dividend increase for the company. Notably, Walgreens is positioned on a healthy dividend growth track. Thus, the solid dividend payouts should appear attractive to investors.

Walgreens’ cash and cash equivalents were almost $3 billion in the third-quarter fiscal 2013, up 50.1% from the year-ago quarter. Moreover, it generated operating cash flow of $1.4 billion and free cash flow of $1.1 million, reflecting sequential improvement from the second quarter.

With a strong cash position, the company always strives to benefit its shareholders through dividend payments and share repurchases. Walgreens’ strong balance sheet has enabled it to consistently hike dividends.

We note that fiscal year-to date, Walgreens did not repurchase any shares under its current buyback program to repurchase up to $2 billion of its common stock through Dec 31, 2015. Investors may also look forward to rewards in the form of considerable share repurchases with optimism.

While Walgreens’ strategy to reward shareholders boost optimism, the persistent lower-than-expected sales remains a matter of concern. The company also missed the earnings mark when it reported third-quarter results in late June.

Currently, the stock carries a Zacks Rank #3 (Hold). While we remain on the sidelines for Walgreens, Herbalife Ltd. (HLF - Snapshot Report), carrying a Zacks Rank #1 (Strong Buy) warrants a look. Zacks Rank #2 (Buy) stocks such as AmerisourceBergen Corporation (ABC - Analyst Report) and CVS Caremark (CVS - Analyst Report) are also worth considering.

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