Trustmark, Walgreens Join 'Clean Stocks' List

Blemishes? Executive compensation needs watching, as does the concentration of power that combines the offices of chairman, president and CEO in one executive, Richard Hickson. Hickson's 2002 cash compensation isn't out of line at $550,000 in salary and $550,000 in bonus, but his 2002 grant of 45,000 options represents 11.5% of all options granted to employees that year.

Walgreens: Yes

I think Walgreens' management proved itself in the drugstore wars of the 1990s. While all of its competitors were busy bulking up by acquiring smaller drug chains, Walgreens concentrated on internal growth. Now that many of those same competitors are busy disgorging those acquisitions either through store closings or bankruptcy reorganizations, Walgreens looks awfully smart.

This is the kind of steady long-term thinking -- and execution -- that characterizes just about everything about Walgreens. The company has no long-term debt, but with Walgreens' cash flow, $1.5 billion from operations in 2002, the company has plenty of internal cash to use for expansion. Walgreens has doubled its store base to a current 4,200 over the last decade.

Management is homegrown. The company has had only five CEOs since Charles Walgreen founded it in 1901. Current CEO David Bernauer has worked for the company 35 years, and President Jeffrey Rein began his career as a pharmacist.

The company's governance looks solid, too. Independent members hold seven of 10 spots on the company's board. Auditor Deloitte & Touche is paid $455,000 to audit the company and $371,000 for all other work. And Bernauer's pay of $763,000 in 2002 and $490,000 in bonus is about average these days.

No company is perfect. Bernauer got 10% of all options granted to employees in 2002. That's extremely high, but 75% of those options were a special grant that he received upon taking over as CEO. So while it bears watching, it's not enough to make me bump the company from Clean Stocks. The company has $129 million in off balance sheet letters of credit to suppliers among others. While that also bears watching, it isn't too worrisome at a company with no long-term debt.

The addition of Trustmark and Walgreens to the Clean Stocks list brings membership to eight stocks. The other members are Apache (APA Quote), Applebee's (APPB Quote), Expeditors International, Paychex (PAYX Quote), Stryker (SYK Quote) and T. Rowe Price.

Maybe next month we'll get to 10.

Nominees for due diligence for the next round are Warren Buffett's Berkshire Hathaway (BRK.B Quote) -- is Buffett a shoo-in?; Texas Instruments (TXN Quote) -- can any tech company with its big lump of unexpensed options make the list?; and The Washington Post Co. (WPO Quote) -- can you trust the media when it comes to an investment?

Thanks to everyone who made these and other suggestions for the Clean Stocks list. Please remember to email me with new nominees (old nominees are held over for future consideration) and with any comments you have on the stocks now on the list or those now under the microscope.

Expect the next report around mid-December.