Walgreens Boots Alliance (WBA -0.83%) is a household name in the country and the pharmacy retailer is a trusted brand for millions of customers. But the business has had a difficult time generating any meaningful growth. It has pivoted to healthcare and the launch of primary clinics, but this move could take years to pay off.
As it has focused more on growth, the company took a significant step earlier this year, cutting its dividend to free up some cash. This should help with its long-term growth strategy. Now that the stock is trading at levels it hasn’t seen in 15 years and possibly looks to be on a more positive trajectory, has Walgreens (finally) become a good investment to add to your portfolio?
The company could look a lot different in a few years
While Walgreens slashed its dividend this year, cash remains a big issue. The company needs plenty of it to fund its healthcare expansion, and it has now turned to the sale of assets and investments. Earlier this month, Walgreens announced that it had sold shares of Cencora (formerly known as AmerisourceBergen) for proceeds of $992 million. The sale will reduce its stake in the healthcare business from around 15% to 13%.
The company is also reportedly looking at selling its specialty pharmacy business, Shields Health Solutions. That sale could be worth close to $4 billion.
An even larger move might involve the possible spinoff of Boots UK, which could be worth more than $8 billion. Walgreens previously considered selling the U.K.-based drugstore but decided against it in the summer of 2022. Now, however, with the company’s financial position not looking all that strong, all options appear to be on the table for Walgreens’ new CEO, Tim Wentworth, who took over back in October.
As of Nov. 30, 2023, Walgreens reported cash and cash equivalents of just $784 million. It’s particularly troubling given that over the past quarter, the business burned through $281 million just over the course of its day-to-day operating activities. It also spent another $415 million on dividend payments.
There is a big need for Walgreens to strengthen its cash position and by selling assets and cutting its dividend, management is showing that it is taking the situation seriously.
The dividend is lower but that doesn’t mean it’s safe
Walgreens made a big move at the start of the year when it announced it was cutting its quarterly dividend from $0.48 last year to $0.25. At $1 per share for the full year, the yield is 4.5%, which is still well above the S&P 500 average of 1.4% and higher than rival CVS Health, which yields 3.5%.
Walgreens’ new dividend will be less of a drain on the company’s financials. But that doesn’t necessarily mean it will stay safe. In its most recent quarter, for instance, Walgreens reported a loss. And it also burned through cash. If those trends continue, even Walgreens’ current payout may not be sustainable.
A business needs to generate positive cash flow to be able to sustain a dividend without having to raise money to make the payments. In the trailing 12 months, Walgreens has incurred an operating loss of more than $1 billion.
Investors may assume that since the dividend has been cut, the payout should be safe for the foreseeable future, but that isn’t necessarily a given. Walgreens’ troubles go far beyond just its dividend.
Should you invest in Walgreens stock?
Walgreens is in the midst of a turnaround, and that can be a risky time to invest in a business. There’s uncertainty as to where the business will go and what will or won’t work for the company. Walgreens’ new CEO is showing a willingness to make tough decisions, like cutting the dividend and considering selling assets, for the sake of the company’s long-term future, and that’s a good thing.
But at this stage, it may be too early in the transition phase for Walgreens to be a good stock to buy. There are safer dividend stocks out there to choose. Until Walgreens can demonstrate to investors that its financials are in much better shape, you’re likely going to be better off sitting on the sidelines than taking a chance on this struggling stock.
