Is Walgreens Boots Alliance on the Right Track?

In this podcast, Motley Fool analyst Bill Barker and host Deidre Woollard discuss:

• The big tasks ahead for Walgreens Boots Alliance‘s new CEO.
• What a dividend drop might be signaling.
• How price drops impacted Cal-Maine.

Motley Fool analyst Jim Gillies and host Ricky Mulvey talk about pullback stocks including Aritzia and Shopify.

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on January 04, 2023.

Deidre Woollard: Nobody likes a dividend dropper, but maybe they should. Motley Fool Money starts now. Welcome to Motley Fool Money. I’m Deidre Woollard here with Motley Fool Analyst Bill Barker. Bill, good to see you. Happy New Year.

Bill Barker: Happy New Year. Thanks for having me.

Deidre Woollard: I love to talk earnings. It’s been a minute since I got to. I feel like we’re currently in the calm before the storm in a few weeks but we do have some to talk about. Exciting to me at least, I want to start with the one I’m watching closely. I’m a shareholder of Walgreens Boots Alliance more formally; we just call it Walgreens. But I’m interested in this one for two reasons. You’ve got this new CEO, Tim Wentworth. He’s got a healthcare background. He replaces a CEO, I really was excited about Ross Brewer. She was there, I think less than two years. That didn’t really work out and you’ve also got this company that’s in this pharmacy to healthcare shift. Bill, new CEO, how long before I start to get judging Tim Wentworth’s performance?

Bill Barker: Oh, I don’t know. Have you listened to him? Have you listened to the conference calls? You can judge him right away if you want.

Deidre Woollard: I did listen. Yes.

Bill Barker: What do you think?

Deidre Woollard: I feel like he’s very aware of the problems the company is facing, and I feel like he has a plan. I always I’d like someone who feels like they know what the plan is even when a company is not in the best space at this point.

Bill Barker: You know what the plan is and he’s explained it and so you understand what you think they’re up to. At the point at which he is offering timelines or directions that don’t appear, then you can judge him poorly. At the moment, he came in early mid October. This is the first report since he came in. You expect something a little bit like this, a big bath report where you throw in a bunch of charges and you waive all that in the past, one time stuff going forward, I’ll be judged from the point at which I have cleaned up the mess. This was part of defining some of the financial position of the company as a mess that is being put into the back, put into the past that includes the dividend cut.

Deidre Woollard: Yeah, let’s talk about that because that’s part of the Big Bath approach is. You get all the hard stuff out of the way, you ascribe it to the past situation and you move forward. But 48% reduction in the dividend payout to 25%. Obviously, the market doesn’t love this. It makes sense. You’ve got operating losses here, it’s going to give you cash. But if you’re someone who’s holding this stock for the dividend, you’re not happy. Larger institutions probably not happy about this as well. What are some of the repercussions besides it going down in the market today?

Bill Barker: Well, of course, the market had anticipated with the stock price even before today that there was going to be a dividend cut. That is that the yield was 7% to 8% somewhere in there. That just doesn’t happen particularly with a company that is not in a position to keep that up given the amount of cash on hand and the debt that Walgreens Boots Alliance has. I don’t think this was entirely unexpected. Maybe the degree of taking it down basically by half, that may have been a bit more of a surprise than the fact that a cut was made at all. The market just was not pricing in an anticipation that this dividend could be maintained, or else it just wouldn’t have been at a yield of 8%.

Deidre Woollard: But in general, when you have a dividend cut it, you can either see it two ways. You can see it as a sign that the company is really in trouble, or you can see that it’s a sign that the company is being prudent and taking action. I think it’s more being prudent in taking action here. How do you view it?

Bill Barker: Well, I view it as evidence of some restriction on their capital allocation choices. They can’t allocate capital the way they had given the number of acquisitions that they had made and the dividend where it was, and hoping to maintain that especially with a large chunk of the company’s debt maturing in the next couple of years. They’re going to have to issue a new debt. They have cash on hand to fund operations, but they’re going to need to have some debt at higher levels given today’s interest rates than when they issued the debt. The capital allocation choices are not extensive at the moment. They need to fix their balance sheet, and this is a prudent step in terms of doing so.

Deidre Woollard: Yeah, that’s a really good point with that. But that debt you want to try to pay off as much of that as you can before you have to move on to that higher interest rate. Part of that is those acquisitions that you mentioned. It feels to me like they’re done with the acquisition part of the healthcare pivot with that part of things, and maybe they’re at the integration part of this. I’m thinking about this not just in terms of Walgreens. This isn’t everybody into the pool situation, CVS, a little bit of further ahead on this pivot, Kroger is looking at health. Walmart obviously, Amazon is trying to figure it out. Everyone’s trying to figure it out, I feel like Walgreens needs it to work more than some of those others, although maybe not more than CVS. What do you think about this when you’ve got a bunch of companies trying to chase this one thing. Most of them doing it by acquiring other smaller companies and trying to patch together something.

Bill Barker: Well, there’s a lot of competition here. You’ve got increased use of mail, people getting their drugs delivered by mail. You’ve got more and more players. As you mentioned, the Walmarts, Costco, everybody, Kroger, and Safeway. Everybody you can name can do a lot of what Walgreen’s substantial business is. You’ve got pharmacists who are striking. You’ve got just competition from a lot of different places and the number 2 player, a huge operation. They’re well known and trusted by millions, but the opportunities to increase their prices are very limited. I think given especially some of the attention that’s being paid to the PBM’s which is a remarkable amount of advertising and actually one of the few issues that you can find where there seems to be some bipartisan agreement that this is something worth addressing.

Deidre Woollard: One thing I think is interesting with Walgreens is the retail side wasn’t so bad. They saw some good growth in pharmacy, but a lot of that was due to the cost of drugs. But you mentioned the pharmacists and this part, I think is really interesting because on the earnings call, Tim Wentworth, he talked a bit about how they’re working with colleges. They’re trying to build that pipeline of pharmacists. That’s important because there aren’t enough pharmacists out there. The pharmacists that are there are clearly not happy. You had what they called pharmageddon in October with pharmacists walking out. Part of that is OK. You get more pharmacists and that maybe takes some of the work load off but I also think we’ve seen workers feel more empowered lately and so with Walgreens, do they also have to make those existing pharmacists happier?

Bill Barker: Well, apparently they do. You can’t sustain too many strikes like that. People will just go elsewhere and when they’re used to getting everything always at Walgreens, getting everything fulfilled there because Walgreens has already got my insurance information and I can just go there and they are forced to find other outlets to get their needed pharmaceuticals and prescriptions filled. That’s bad for Walmart, for people, its loyal customers to be finding who else does exactly what Walgreens does for them, but maybe more reliably. Maybe at better prices for some people when they finally have to go out and check out the competition. Yeah, it’s a really difficult spot for them to be and they need more pharmacists. The pharmacists they have have demonstrated that they’re not happy. Walgreens is right now in the midst of trying to execute substantial savings operations in tune in terms of billions of dollars of annual savings on costs. That is a limiting factor on just throwing money at the problem.

Deidre Woollard: Yeah. It’s interesting too. I think about this for the long term, thinking about the role of the pharmacist because you’ve got an aging pharmacist population currently, so you need to bring more pharmacists in. But at the same time, you maybe have some of the pharmacist role being automated or taken over by AI in some way. Who knows what’s down the road? AI gets in to everything. But I think it’s interesting that it’s one of those areas where you have aging pharmacists and, you have an aging population so you’re also going to have an increasing amount of prescriptions and you need to have that knowledge. It’s a tough spot to be in.

Bill Barker: It’s a tough spot for Walgreens. Fortunately, right now in terms of the stock in the company, it is trading at less than seven times adjusted earnings. They reemphasized or reiterated this year’s adjusted earnings. The adjusted earnings are very different from the GAAP earnings at the moment when we mentioned maybe one time charges that were lumped into this quarter. But if you can deliver at the high end of the range, $3.50 a share and let’s emphasize adjusted earnings for a stock that’s trading at less than seven times that amount. Look, if they deliver that this year, the stock’s going to go higher from here. It’s not going to hang around at less than seven times earnings once you convince people that those earnings are repeatable and that you start eliminating the adjustment out of the equation.

Deidre Woollard: I’m going to take us in another topic. We’re going to talk about eggs. One of the things I find fascinating is that there’s this one company that really is a friend of ours called Big Egg or Big Yolk. It’s Cal-Maine. This is interesting because this time, last year, especially around the holidays, everybody was freaking out around the price of eggs and inflation in general and inflation has dropped. Some prices have not dropped with it, unfortunately but egg prices have dropped a lot so good news for us. Bad news for Cal-Maine, because they’re the biggest producer of shell eggs. According to the company, at the end of last year, they were getting $2.88 for a dozen conventional eggs. End of last year, $1.45 so huge drop. Yet this company, I mean this is an interesting one, it’s performed well over the past five years. Not so great over the past year because egg prices. How do you think about businesses that are so dependent on really a single product like this?

Bill Barker: Well, I would certainly start by saying, I have no ability to tell you what is going to happen with egg prices from year to year, or a decade to decade. They’ll probably go up over the course of a decade, but there are things that happen that dramatically affect, it’s a commodity. There’s no brand value to eggs. The things that happen like avian flu outbreak, which is happening again, and which took egg production for Cal-Maine virtually took it down by a half from fiscal year of ’16-’17, that could happen again, that would drive up egg prices, but that’s not a good thing, that’s how it occurs. If Cal-Maine can do a better job of protecting its eggs and livestock than the competition so that it has much less exposure to something that affects the market as a whole then that would be advantageous to it. But they’re not looking for avian flu to in any way improve what happens for shareholders. That’s just not going to happen. I think you’re exposed. You’re exposed when you are a company that has one product and it’s a very fragmented market and they can continue to acquire some of the competition as they’ve been doing relentlessly over the last 30 years. But the nice part about this one products is it’s something that people have always wanted and we assume we’ll always want.

Deidre Woollard: Yeah, that’s true. They’ve done some smaller acquisitions. I know they’re buying an old Tyson broiler factory. They’re going to convert that to egg production. You mentioned the branding. There’s egg brands but there’s no main egg brand but there are types. They’ve got Cal-Maine, they have conventional eggs, but they’ve also got specialty eggs so that’s things like organic, cage free, smaller part of the business, but they’re able to control the prices. Bill, are you the regular egg buyer or are you looking for the cage free or farm raised? What’s your egg?

Bill Barker: I am an infrequent buyer of eggs. There are other things that I’m more competent at buying. But I think I’ve been known when asked, I’m going to the store, what do we need, and eggs is thrown out that I’ll get them, but I have no idea what brand I might want to look for. But I typically would pick up the organic or cage free, or both so because that seems to be what we have in the house.

Deidre Woollard: It’s not price dependent for you?

Bill Barker: No. I am pleased to hear today that egg prices have been cut in half over the last year. I would not have been somebody who would have been able to tell you that from my purchasing experience. There are other products, the prices of which I follow closer than that in the grocery store.

Deidre Woollard: I’m going to get you buy more eggs. Thanks for your time today, Bill.

Bill Barker: Thank you.

Deidre Woollard: Growth stocks steal the spotlight in the financial media. But something way more boring is behind a whole lot of wealth creation, dividends, the regular payments that companies send shareholders. Dividends can make a company a little more disciplined on capital allocation and provide investors with long term streams of income. Some of the Motley Fool analysts behind stock Advisor, our flagship investing service, put together a list of three dividends, stocks to buy this year. We are sending this report to Motley Fool Money listeners for free. Just as a thank you for checking out the show with no purchase necessary. Just go to www.fool.com/2024dividends and we’ll email it directly to your inbox. We’ll also include a link in the show notes. The market was on fire last year, but one luxury retailer didn’t join the party. Ricky Mulvey caught up with Motley Fool candidate Jim Gillies to talk about a couple of pullback stocks and setting expectations for investments in 2024.

Ricky Mulvey: Jim, we have been tasked with discussing some pullback stocks and I feel like this is the harder job to start the year with the segment. This would have been much easier if we were recording this just a few months ago and I’m a long term investor, I want to let my winners run and I’m feeling a little wary right now. Tech stocks rose about 50% in 2023. They feel like we’re at zero interest rates again and how can investors set their expectations during what some may feel is a little bit of a market mania?

Jim Gillies: Sure. Well, yes, obviously it would have been very nice to have done this show say around the end of October, early November before the markets just decided, hey party on guys, let’s go and ran up. I’m going to push back a little bit. I don’t know that I would consider us to be in a market mania phase. I don’t feel terribly bad that yes, tech stocks are up in the last year, largely due to the so called now magnificent seven that are at the front of the S&P 500 and of the Nasdaq. That of course being Meta and Microsoft, and Nvidia, and Apple, Amazon and there’s two more in there. I think for starters, at the start of the year we’ve gone on valuation and second of all, I don’t know that I would agree that we’re back to zero interest rate levels. I’m a Canadian and so our tech sector basically consist of two companies Shopify and Constellation Software. I will point out Shopify today, it’s up 120% in 2023. That’s fantastic and great. Still about 55% below, it’s all time high, which tells you, I think a little bit about how crazy things got during the tail end of COVID running up to say November 2021, maybe early 2022 and how much things fell such that you can get 120% gain in a year, which by all accounts is a pretty good year. You still need to more than double to get back to where you were at one point.

I think a lot of maybe a little bit of recency bias where we look at what’s happened in the last three or six months and go, boy, things have gotten really expensive and what I like to do when I’m feeling this way and it’s something when I talk to other young analyst in a mentor role or when I’m trying to annoy a coworker of mine who might like a stock that I loathe or vice versa. I like to say there’s two questions that matter in investing. There’s two questions. The first question is, what is it whatever the stock is, what is it worth and why? I feel that if you can answer those questions in any market environment, euphoric, despondent, flat, I think you’re probably pretty good ground there because you’re going to be wrong obviously because we don’t have perfect foresight. But it helps a framework to start deciding, well what is it worth? What is a Constellation Software worth? Why is it worth that? What is a Facebook/Meta worth? Why is it worth that? Meta’s up, what? I think it came into the year sub 100 bucks and now it’s over 300?

Ricky Mulvey: That’s pretty good.

Jim Gillies: Well, it’s pretty good, but I actually bought and sold, I still call it Facebook. I actually bought and sold Facebook in early 2023 for a fairly quick double. I don’t particularly like the stock, but I looked at it and answered those questions, what is it worth and why and said, well, it’s worth considerably more than where it hits trading here at what, 80 or 90 bucks kind of thing.

Ricky Mulvey: It was basically, and I know the PE multiple has faults. At one point, Facebook was trading less than the regular S&P 500 multiple. It feels like if you own that much of the internet and you have three billion people interacting with your platform, like those network of effects got to be worth a little bit more than the average.

Jim Gillies: Yes. You’ve just gone a long ways to answering the second question, the why.

Ricky Mulvey: One of the things if you’re going to take advantage of stocks in a pullback is you got to have some dry powder to do so. How are you thinking about as we start the New Year, how are you thinking about your cash position? How should investors think about their cash position right now?

Jim Gillies: My cash position was fairly large coming into Autumn 2023 for various reasons. Most of it I actually deployed between September and November, so I’m a little light on cash at the moment, but I think given what’s happened in November, December, that turned out to be fairly prudent. But then the trick becomes, unless you were going to sell something to buy something else, which means you have to get two decisions, you have to get the selling correct and the new purchase correct. I prefer to replenish my cash position, and so I’m in the privileged position of I’m still gainfully employed, at least Knock-wood until the end of the year and so every paycheck, every paycheck, X percent goes into the investment account, X percent of my significant other’s paycheck goes into the investment account, and so you’re continually adding cash for future now obviously as your portfolio ideally gets larger, those incremental cash ads become less and less important. But also, I think that, I know this is going to air in the new year, but I’m a big fan of tax loss harvesting and again, you’re going through that little mini framework of mind, what’s it worth and why. In this case it makes you forced to look at this stock in certain name here, whatever. This stock is down 50, 60% this year. Why is it down so much? What’s happened? You start answering those questions, like maybe management biffed an acquisition, maybe you simply paid too much when you bought it and the prospects growth has fallen off at the company so the prospects might not be great for a recovery. But these types of things allow you to say I’m going to harvest for tax loss purposes, or I’m going to harvest some losers to redeploy in the New Year into winners. Maybe if you have I want to avoid wash sale rule things, maybe you still like the company, you sell it now, you buy it back in the new year after what is it usually 30 days. I think for wash sale rules.

Ricky Mulvey: We’re doing December advice in January, Jim.

Jim Gillies: Well, it’s funny thing, Ricky. December comes every year and I think you can very comfortably start planning for December 2024 and also nothing says you can’t take a tax loss in let’s say June.

Ricky Mulvey: When we talked about what’s it worth? You got to know a little bit of the multiples to tell the story. One industry you pay attention to is retail. I’ll say the physical retail space and there’s one ETF covering it, called XRT. Still off about 30% from COVID highs. Since this is one of your playgrounds, how are you looking for opportunities in this space? Are there one or two valuation metrics that newer investors coming into this show can use to compare those physical retailers?

Jim Gillies: Unfortunately, they’re not easy metrics to find. Anyone can look up same store sales or comp sales or whatever we’re doing. The metrics of everyone can look up on earnings multiple may or may not be terribly useful frankly. My preferred thing is to say if I want to look at something in the retail space, although that could apply to pretty much anything, as I would encourage new investors to take an extra step. I want them to take an extra step because the more extra steps you take and you understand why you invest in the things you do, and you understand how to maybe look at a company that gets you more involved, it makes you more sticky. I think it makes you a more long term investor because you are starting to build. The dirty little secret, right? We recommend stocks for a living, but we certainly don’t know everything about a company on the Day 1 where we recommend it. We’re building relationships. I know and I learn more about a stock I’ve invested in a year, two years, three years down the road. But one of the things that I’m a real big fan of cash flow as you know, and so for a newer investor I would say, acquaint yourself with a company’s financial reports. Look up the annual report. You don’t need to look at quarterlies yet. But go find the most recent annual report. They’ll be on the company’s website under the investor relations section. There are three main financial statements and they’re all important in their own way. But ignore the income statement for now, ignore the balance sheet for now, just go to the cash flow statement and look up two lines.

The first line is cash flow from operations or from operating activities, quite often said and the second line is down in the section on investing cash flows. It’ll say capital expenditures or purchase of PP&E, property plan equipment, that thing. Simply take operating cash flow and subtract what the company spent on capex. That gives you a rough idea of what the company produced in terms of cash flow. Cash flow that they don’t need to finance and roll into and finance their own activities. It’s cash flow that in theory they could just turn around and hand all of it to their shareholders. In theory it’s called free cash flow. Do that and then compare that to the price, the value of the company, the entire market cap of the company, which is the share price multiplied by the number of shares. You can even maybe bring in, if the company employs debt or whatever, you can even bring in debt and say add that in, but you want to pay a reasonable price for whatever you’re getting. The next thing though is understand a little bit of the business you’re buying. Just for fun, we’ll throw out here, GameStop. The famous meme stock that got everyone in a tizzy a couple of years ago. Sells video games, collectibles, video game systems, what have you. Not a lot of growth there, so you’d like to see [inaudible]. You’d like to see them producing more cash because that is an industry that’s on the decline, going away. There’s always the fear that physical media will just disappear and everything will be streaming so you’ll get your games the same way you get your Netflix.

If you did want to buy GameStop, and I’m not a fan of GameStop at this price, but if you did want to buy GameStop, you would start gauging and say, well, if I could pay less than 10 times cash flow for this and I’m reasonably sure the cash flow is decent, maybe that’s in this type of a company, maybe it’s good. But since we are trying to talk a little bit about rebounds or maybe buying opportunities on pullbacks, there is a Canadian retailer that I’ve got my eye on and that I have recommended in the service that I front. It’s a company called Aritzia. I am not a fashion plate of course, but other people are and it’s been very successful in Canada until really the last year. It was really successful the ticker is ATZ on the Toronto Stock Exchange and there is a pink sheet listing, which I don’t have off the top of my head, but it’s a couple billion dollar company, I believe. Basically, they’re maxed out in Canada in terms of their growth here. But they’re not trying to grow in Canada they are coming south. We are invading the United States. Aritzia has been very deliberately coming into the states following a strategy because they are very popular here and a concept that works here generally could work there. An example I would give you Canadian company where it maxed out in the country and worked very well here and has also worked very well down there. You’ve heard of Lululemon?

Ricky Mulvey: Heard of it. I own the stock as well.

Jim Gillies: Beautiful. That is a great example of what I’m looking at with Aritzia here. Because you might remember about a decade ago, Lululemon, currently about $500 a share, was $135 a share stock because they’d gotten beaten down. They had some executive turmoil, they had a bit of a scandal. Some of their very popular leggings were denoted as see through, not generally good, and so the stock got beaten down as a result. That’s where Aritzia is right now, because they turfed on some of their fashion. They turfed on some of their growth plans. The stock is down 40% this year, but they are spending significant cash. We look at our cash flow and they’re spending a little bit more cash than they’re making right now. But the reason for that is for this broad push into the US. If it works similar to what Lululemon did, they’re able to correct their problems. They’re able to continue their growth trajectory, this could be really interesting for investors in say 5-7 years.

Ricky Mulvey: Jim, I think you just answered the last three questions I had in the outline with that one. No, one of these days we’re going to have Gillies’ rants unleashed on the show and I can’t wait for that day. [laughs] Jim, as always, appreciate your time and your insight.

Jim Gillies: Thank you, Ricky. You take care.

Deidre Woollard: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. I’m Deidre Woollard. Thanks for listening. We’ll see you tomorrow.