Companies that have increased their dividend payouts for at least 25 consecutive years are called Dividend Aristocrats. Generally, this kind of dividend growth suggests the company has robust financials, generates predictable cash flows over market cycles, and maintains a sustainable payout ratio.
But one Dividend Aristocrat that's burning cash - and has trailed the broader markets by a wide margin - is Walgreens Boots Alliance (WBA). Valued at $17.66 billion by market cap, WBA is a U.S.-based healthcare, pharmacy, and retail company. Walgreens has raised its dividend for 47 years, establishing not only its Dividend Aristocrat credentials, but approaching Dividend King status.
The stock is down 72% from all-time highs, increasing its dividend yield to 9.39% - the highest on the Dow Jones Industrial Average ($DOWI), currently. Since dividend yields and share prices are inversely related, a sharp decline in the stock price will result in higher yields. So while a high yield might seem attractive, it's also often viewed as a red flag that warrants further analysis.
So, let's see if you should Walgreen Boots Alliance stock for its high dividend yield today.
Why Is WBA Stock Falling?
With $139 billion in annual sales, Walgreens Boots Alliance is a retail pharmacy giant with operations in nine countries. It is among the largest buyers of prescription drugs globally, which suggests WBA is adjacent to a recession-resistant sector.
Its massive size has allowed WBA to benefit from economies of scale in the past. However, in the last few years, rapidly changing shopping habits have led to a decline in retail store traffic, pressuring margins at Walgreen Boots Alliance. In the last five years, WBA’s adjusted earnings have declined by 9% annually, driving share prices lower in the process. In fiscal 2023 (ended in August), Walgreens reported an operating loss of $6.9 billion, compared to profits of $1.4 billion in fiscal 2022.
Two years back, WBA increased its ownership stake in VillageMD with an investment of $5.2 billion. This investment would allow VillageMD to open 600 locations at Walgreens stores. But until June 2023, just 200 co-located VillageMD clinics were built, of which 60 will be closed soon. Additionally, large-cap companies, including Amazon (AMZN) and Walmart (WMT), are expanding into the healthcare space, which might be a long-term headwind for WBA.
In fiscal Q4 of 2023, WBA reported revenue of $35.4 billion, an increase of 9% year over year. Net losses totaled $180 million, which was narrower than the loss of $415 million in the year-ago period. WBA has focused on lowering its cost structure and expects to achieve cost savings of $1 billion in fiscal 2024.
Will Walgreens Have to Cut Its Dividend?
Walgreen’s free cash flow has cratered from $4.17 billion in fiscal 2022 to $141 million in 2023. It paid an annual dividend of $1.92 per share, totaling $1.65 billion, which suggests the payout ratio is not sustainable and Walgreens has to increase profit margins significantly.
The company also ended fiscal 2023 with $740 million in cash and $34.5 billion in debt. Its debt balance has more than tripled in the last five years, making investors particularly wary amid ongoing interest rate hikes in the last 20 months.
Priced at 6.7x forward earnings, WBA is attractively priced. However, for it to increase or even sustain its dividends, Walgreens will have to improve its free cash flow margin.
Out of the 14 analysts tracking WBA, three recommend “strong buy,” nine recommend “hold,” one recommends “moderate sell,” and one recommends “strong sell.” The average target price for WBA stock is $29.08, which is 40.5% above the current trading price.
