﻿2023 has been a bad year for Walgreens. The viral news of theft and store closures is just
the start. The stock is down over 43% year to date. This only adds to the decade-long
bear market for WBA stock. Overall, the price is now down 78% from its 2015 high.
As if it couldn't get any worse, the company's board just asked CEO Ross Brewer to step down.
This was a surprise for many following the stock as she only joined the company in 2021. It now
leaves Walgreens’ future even more uncertain. The only thing that has stayed positive and
growing at Walgreens is its dividend payment. The company has 47 years of consecutive annual
dividend increases. However, this growth is slowing dramatically. Last year's increase
was only 0.42%. On top of this, Walgreens free cash flow has dropped negative 3 of the last 4
quarters. With the recent price drops, WBA stock now has a dividend yield of 9.3%. That may seem
like a good value for dividend income investors, but it may be a value trap. The risk of a dividend
cut is a real possibility. In today’s video, I’m going to provide an updated analysis of
Walgreens stock and explain whether or not I think Walgreens will cut their dividend payment.
My name is Zach, this is Dividend Data, and you should leave a like and subscribe to the channel
if you enjoy the video. Throughout, I’ll be using the stock research tool I personally developed,
which is available at DividendData.com. Here you can do deep analysis on over 7,500 stocks, helping
you find better investments. Most importantly, you can avoid poor or risky investments like I
will discuss today. There is a 14-day free trial so feel free to sign up and follow along.
Walgreens Boots Alliance, ticker symbol WBA, has a current stock price of $20.65 with 863
million shares outstanding, giving it a market cap of $17.8 billion. The company is primarily
a pharmaceutical retailer which owns the brands Walgreens and Boots. On top of this,
they own the No7 Beauty Company and are expanding into healthcare. We will talk more about that
healthcare business later. As of 2023, virtually all their operating cash flow is from the retail
operations. That business is not doing well. The pandemic related surge in store traffic
from vaccine and testing is practically gone. The problem of theft is rampant in many store
locations. So much so they are forced to lock up most of the merchandise, requiring employee
assistance, which will obviously reduce sales. Also, the threat of competition is getting larger
by the day. It is very difficult to differentiate in pharmacy, as much of the services are being
replicated by larger grocery chains, Costco, Sam's Club, Amazon, etc. The company is closing
150 U.S. Walgreens locations and 300 Boots UK locations. This is in an attempt to cut costs
by closing poor performing stores. So how bad is this impacting their financials? Pretty bad.
As I mentioned earlier, 3 of the last 4 quarters have had negative free cash flow. In total,
free cash flow is -$821 million in that time. Operating cash flow is down massively
year over year, with the latest quarter even being negative -$20 million. On top of this,
they are spending more than ever on capital expenditures to grow this new healthcare
segment which is unprofitable. Q3 capital expenditure was $525 million. They are facing
both an income problem and a spending problem. For fiscal 2023, free cash flow per share will not
only be negative, but likely the largest loss in over 30 years. So it’s not going well and
only seems to be trending worse. For context, the WBA stock dividend payment is $415 million every
single quarter. Obviously, they cannot afford this unless the company gets turned around quickly. The
WBA dividend was once considered very safe. In 2021, the dividend payout ratio based on
free cash flow was 38%. It has been in this 20-40% range for much of the past decade. However, 2022
was the start of a bad trend with a 76% free cash flow payout ratio. As I mentioned earlier, this
has only gotten worse and worse. The 2023 dividend payout ratio will be outrageously unsustainable.
This is not a cash rich company that can just take these losses either. As of Q3,
the company only has $970 million in cash on hand. It is also loaded up with $36.4
billion of total debt, putting net debt at $35.46 billion. If Q4 is a repeat of Q3,
then they are in a horrible situation. They will be forced to get more debt at unfavorable
rates in order to keep paying the dividend and meeting their planned capital expenditures. Over
multiple quarters this could get very ugly. The company has already started taking drastic
actions. The board basically fired the CEO even though they say it was mutual. Then they
sold off some of their stake in AmerisourceBergen for $1.85 billion. This gives them a little more
wiggle room for a few more quarters. The company still owns about 16% of the publicly
traded drug distributor. It’s valued at $8.17 billion, meaning Walgreens still has about $1.3
billion of potential value here. Unless operating cash flow improves, the company
will be forced to continue selling assets. As I mentioned earlier, Walgreens is spending
more than ever. This is as they invest in their healthcare business segment,
which they view as their long-term growth driver. This includes investments in VillageMD,
Shields Health Solutions, and CareCentrix. This expands Walgreens capabilities in primary care,
specialty pharmacy care, and post-acute care. From a strategic standpoint all of this is very
important. It helps build a competitive advantage around their pharmacy retail business by expanding
their healthcare relationship. However, this segment is unprofitable with no timetable on
a path to profitability. They are also spending more building out these locations, at the same
time their operating cash flow is crashing down. Walgreens’ management has some tough choices to
make. They can cut the dividend payment and invest in this healthcare growth strategy.
Or they can keep the dividend, sell off assets, cut as much expenses as possible,
and slow down the healthcare strategy. They may even abandon that healthcare business outright.
So what do I think is going to happen? Personally, I have my expectations set that there will be
a dividend cut. However, I’m not 100% sure. The firing of Ross Brewer may signal a large shift in
strategy. Much of the healthcare growth initiative was spearheaded by her. Also, the 47 years of
consecutive dividend growth is a massive streak. Some boards have lots of pride around this and may
choose a dividend cut as the last resort. Some of you may remember that I used to own
Walgreens stock. I bought in 2021 and proved to be dead wrong about my investment case. Ultimately,
I sold in fall 2022 at a loss and put much of the money into Microsoft stock. There
is nothing wrong with selling, taking your losses, and reinvesting elsewhere. However,
if you’re holding out hope Walgreens is definitely not dead. The company’s value has fallen so much
it could be a value play. Keep in mind though that there is a large risk of dividend cut and it may
take many years for the companies earning power to improve. This will be a long turnaround.
If you want to use the research tool I’ve been showing throughout the video,
then sign up at DivivdendData.com. If the software helps you identify just 1 slightly better stock,
then it pays for itself. Please leave a like and subscribe to the channel. Thanks for watching!