Katie asked me to take a look at an interesting stock this week: Walgreens Boots Alliance (Nasdaq: WBA). Pharmacy giant Walgreens merged in December with the U.K.’s Alliance Boots to form one company focused on global health.

Prior to the merger, Walgreens paid a quarterly dividend for 82 straight years and raised the dividend for 39 years in a row.

Walgreens’ yield is not particularly high at just 1.6%, but its annual dividend growth rate has been impressive. Last year, the dividend grew by more than 7%.

[ad#Google Adsense 336×280-IA]Over the past three years, its growth rate has been 17%, and it’s stretched above 20% over the past five and 10 years.

So the track record is superb.

The payout ratio is a bit of a mystery because we don’t have any results from the combined company yet.

We do know that in the fiscal first quarter, which ended in November, Walgreens, which had not yet merged with Alliance Boots, had a payout ratio of just 48% of free cash flow.

For the full fiscal year 2014, ending in August, Walgreens generated $2.8 billion in free cash flow and paid out $1.2 billion in dividends for a payout ratio of 43%. That is a low payout ratio that would have given me a lot of confidence that the dividend would likely be raised again this year.

The combined company’s free cash flow is projected to fall this year to $2.1 billion, in part due to a significant increase in capital expenditures. Going forward, it is forecast to grow meaningfully to $3.2 billion in fiscal 2016 and $4.9 billion in 2017.

In the proxy statement on the proposed merger, Walgreens said if the deal was completed, there would be 1.09 billion shares outstanding of the combined company. Based on the $1.35 per share annual dividend, the dividend expense should be approximately $1.5 billion.

That would give us a payout ratio of about 66%. Historically, the company has raised the dividend in August. Let’s assume we get a nice 10% bump in the dividend next year. That would mean about $1.65 billion in dividends versus $3.2 billion in free cash flow, for a payout ratio of 52% – well within my comfort range.

I have not found any statements by the new management about the dividend and whether it plans to continue to raise it each year as it has done for nearly four decades. It certainly can afford to raise it based on the above projections.

The CEO and CFO are from the Alliance Boots side of the equation, while the chairman is from Walgreens. If I had to guess, I would assume that the company will continue to raise the dividend in 2015, although it’s hard to be sure.

However, I feel more certain that the company will not cut the dividend.

There is no reason to.

It generates plenty of free cash flow.

Even if it needed the billion and a half dollars for acquisitions, the company could likely borrow the money or even issue stock rather than cut the dividend.

Slashing or removing the dividend would anger a lot of shareholders and likely send the stock tumbling.

While the fact that the combined company is a new entity makes this analysis a little bit trickier, I believe the dividend is secure.

Dividend Safety Rating: A

— Marc Lichtenfeld

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Source: Wealthy Retirement