Different investors and consumers have come to know pharmacy and wellness company Walgreens Boots Alliance (WBA) through a variety of ways.

That’s because the company has transformed itself over time.

If you are based in the U.K. you might think about the Boots side, which traces its roots all the way back to 1849. By 1933, Boots already had its 1,000th store.

If you are in the U.S., then the Walgreens name – tracing its roots back to 1901 – probably catches your attention. This company invented the malted milkshake, went public in 1927 and hit $1 billion in sales by 1975. Chances are pretty good that there is a Walgreens on a corner near you.

And the Alliance side comes from Italy, tracing its roots back to pharmaceutical wholesalers founded in 1977 and 1982 before combining in 1997 as Alliance UniChem.

Ultimately Alliance merged with Boots in 2006. And finally Walgreens merged with Alliance Boots in 2012 to become today’s company. It’s been a long journey.

That journey has created a strong business generating significant dividend growth. Walgreens Boots Alliance currently ranks as a Top 30 dividend growth stock using The 8 Rules of Dividend Investing.

This article takes a deeper look at the investment opportunity of Walgreens Boots Alliance.

Here’s what the company looks like today on a global scale:

Source: Walgreens Boots Alliance, About

The dark blue shading represents countries where the company owns businesses. The green shading shows equity investments and the light blue highlights branded products and franchises.

As a result of the many mergers to create today’s company, the operating history isn’t quite as straightforward as many other securities. Still, we can get a good sense of what toady’s business is about by looking at how Walgreens has developed through the years.

Walgreens Boots Alliance:A Long History Of Success

Over the last decade Walgreens has generated anywhere from $1.7 billion to $4 billion annually in profits. The dividend has been even more impressive.

Walgreens Boots Alliance and its predecessor company Walgreen Co. has paid a dividend for 334 straight quarters (that’s over 83 years). Equally as compelling is the idea that this dividend has not only been paid but also increased for 40 consecutive years.

The company’s long dividend streak makes Walgreens Boots Alliance one of just 50 Dividend Aristocrats.Dividend Aristocrats are stocks with 25+ years of consecutive dividend increases.  Click here to see all 50 Dividend Aristocrats.

$1 invested in Walgreens in 1986 would have grown to $73 today (with dividends reinvested).This comes to a compound annual growth rate of 15.1% a year.

Note:1986 is 1st full year of price data for WBA in Yahoo! Finance.Logarithmic scale used in image.

And as we’re about to see, these dividend increases were not immaterial. The payout boosts have been especially impressive as of late.

Performance Over The Last Decade

Here’s a look at Walgreens' business and security performance from fiscal year 2006 through fiscal year 2015:

This is the sort of information that enables you to think about both the past results of the firm along with the important factors moving forward. On the top line Walgreens posted very impressive overall sales growth. The company went from generating $47 billion in sales to over $100 billion by 2015.

Perhaps just as noteworthy was the idea that this type of growth was not at the expense of the quality of sales. Walgreens’ net profit margin actually increased during this period, resulting in company-wide earnings growth nearing 10% annually.

The share count for Walgreens is an interesting note by itself. From 2006 through 2011 the number of common shares outstanding was steadily declining.

There were just over 1 billion shares outstanding in 2006 as compared to under 890 million by 2011. That’s a rate of decrease of nearly two and a half percent per year. However, since that time Walgreens has had a good amount of acquisition activity. As such, the share count began to climb, resulting in nearly 1.1 billion common shares outstanding today.

As a result of the increased share count, the earnings-per-share growth rate trailed that of the overall earnings growth rate of the company as a whole. Essentially the long-term shareholder had to split the earnings pie (which has been growing very nicely) with a slightly larger number of shareholders.

The past valuation for Walgreens is also interesting. If the beginning earnings multiple and the ending multiple remain the same, share price growth rate will be equal to earnings-per-share growth rate. This was not the case.

Instead, the earnings multiple went from the high-20’s down to the low-20’s. This P/E compression lead to share price growth of a bit over 6% annually – still solid, but much slower than the pace of business growth. Incidentally, this is a good demonstration of the ebbs and flows of share prices and the finicky share price bids that can result.

The dividend growth for Walgreens has been exceptional – clocking in at nearly 20% per annum for a decade. Part of this was a result of the nearly 10% annual earnings growth. The other part resulted from a payout ratio that went from around 15% all the way up to 35%. Still, the beginning dividend yield in 2006 was below 1%, so the benefit of the dividend was naturally positive but not overwhelmingly so.

In total an investor would have seen annual returns of just over 7% from fiscal year 2006 through 2015. As a point of reference, that’s the sort of thing that would turn a $10,000 starting investment into $20,000 or so after nine years.

Walgreens was helped by its strong revenue growth, expanding payout ratio and increasing profit margin in the past. The security was hindered a bit by the increase in the share count to go along with P/E compression. Overall past investors saw quite reasonable results from a high quality firm.

Of course all of that is in the past. Let’s think about the future.

Walgreens Boots Alliance’s Future Growth Potential

As to potential growth catalysts you have an increasing and aging population that’s apt to demand more of the company’s products.

Naturally, Walgreens does not have to succeed, but the company is well positioned and has demonstrated its inclination to grow through in the space through past acquisitions along with its current pursuit of Rite Aid (RAD).

Walgreens anticipates rather robust growth moving forward. Namely adjusted earnings-per-share for this year approaching $4.50 to go along with double-digit longer-term growth:

Source: Walgreens Boots Alliance, Investor Roadshow

Incidentally the company recently increased its guidance for this year to $4.35 to $4.55 for fiscal year 2016. Analysts are presently anticipating 13% to 14% growth for Walgreens over the intermediate-term. So those numbers should give you a ballpark idea of what is anticipated. It doesn’t mean that this has to occur, but it does highlight the potential.

Let’s work with a hypothetical scenario to get a feel for the current value proposition being offered:

The middle column displays the same historical information as highlighted above. The right-hand column provides a set of hypotheticals for the next decade.

On the top line I presumed 9% annualized growth – roughly in line with what the company previously achieved. Naturally this number could be much lower – 9% annual growth is a rather robust assumption for a very large business – but it follows that there are numerous potential catalysts as well.

With a steady profit margin and small decrease in the number of common shares outstanding, you might anticipate that Walgreens could grow earnings-per-share by around 9% annually as well.

Keep in mind that:

1. Tthe company’s management expects low double-digit growth
2. Analysts are looking for 13% to 14% growth.

So while 9% growth may be quite a bit faster than your typical company, it might not be an outlandish expectation.

Walgreens historical earnings multiple over the past decade has average about 18. Using this number for a future estimate results in the expectations of 7% annual share price appreciation.

This is where it’s important to remember that the above table is merely a baseline – one possibility out of many that acts as a guide but certainly not an absolute. Should shares continue trading with a P/E ratio in the 20’s, the share price appreciation could be much higher. Alternatively, should shares trade with an earnings multiple closer to say 15, you’d assume slower share price growth. It’s all about your expectations.

Finally, you have the dividend component. With a current yield around 1.7%, Walgreens doesn’t exactly win any awards for high yield. However, given a very strong and fast growing underlying earnings base coupled with a moderate payout ratio the dividend could certainly continue to increase at a robust rate.

Once you add in the dividend, using the above assumptions, you might be looking at annual returns in the 8% to 9% range. As a point of reference, that’s the sort of thing that could turn a $10,000 starting investment into $23,000 or so after a decade.

Final Thoughts on Walgreens Boots Alliance

This is how I’d start to think about an investment in Walgreens. First, I’d review the history and think about the interaction of business performance and security performance. Over the past decade Walgreens’ business has been very solid, but not all of that was captured by today’s investor as a result of the decrease in the earnings multiple.

Today the valuation appears more reasonable, but it’s still well within the realm of possibility that future returns could again trail business results as the P/E ratio declines. This doesn’t have to hold, but it’s something that I would consider as a possibility nonetheless. Still, this aspect alone does not indicate that an investment today cannot be worthwhile.

Especially if the company is able to achieve its goal of low double-digit earnings growth, a bit of P/E compression could still result in solid annualized gains. And to be sure the results could be much better should the earnings multiple remain where it is or even increase. Today’s valuation proposition for Walgreens is based on a few factors: the quality of the business, whether or not the anticipated growth actually formulizes and the interaction of this growth with the current earnings multiple.

Walgreens currently ranks in the Top 30 high quality dividend growth stocks using The 8 Rules of Dividend Investing.The company ranks highly due to its stability, low payout ratio, and excellent growth prospects going forward.

Walgreens stock will become even more attractive if the price-to-earnings ratio continues to decline (which would also increase yield).