I always get a small thrill when I see that a company's quarterly dividend hits my account as a credit. There's something special about getting rewarded for contributing your capital. And what's better than getting that feeling for years and years on end?
That's why I'll be proposing Walgreens Boots Alliance (WBA -0.11%) as a killer dividend stock today. Between its time-tested retail pharmacy business model and ability to deliver quarterly payouts to investors, there's a lot to like about this stock. Let's analyze.
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Winds of change are coming
Walgreens operates upward of 13,000 retail pharmacies across the U.S., Latin America, and Europe. In the context of the pandemic, its stores serve as local centers for administering coronavirus vaccines and diagnostic tests.
Aside from being an indispensable part of the consumer healthcare infrastructure in the U.S., Walgreens also carries many of the food, beverage, and hygiene items you'd find in a convenience store. No matter what food items are on sale, people are bound to keep coming back to get prescriptions filled, and that's one of the reasons this stock isn't fading away anytime soon.
As a retailer, Walgreens' profit margin is thin, at 4.7%. But its base of revenue is decidedly fat, with its trailing 12-month total surpassing $134.9 billion. As you may have guessed, pharmaceutical retailers aren't exactly expanding like wildfire. Since 2013, its annual revenue rose by only 84.9%, and its yearly earnings before interest, taxes, depreciation, and amortization (EBITDA) have budged upward by a scant 5.2%.
That slow pace might be changing slightly for the better sometime soon, as the company pivots into providing primary care and basic outpatient services at newly built-out locations adjacent to its pharmacies. Management thinks the new offerings will eventually help to accelerate its earnings per share (EPS) growth rate to between 13% and 15% over the long term. And with earnings slated to increase, the company should have plenty of money to continue paying its dividend, which is one of the major draws for investors.
Right now, its dividend has a forward yield of just over 4%. More importantly, over the last 10 years, the dividend has risen annually without fail, with its payout increasing an impressive 112% higher over that time.
In fact, Walgreens has hiked its dividend annually for even longer than that -- some 46 years in all. That makes it a Dividend Aristocrat, one of an elite group (and only fours years away from Dividend King status), something especially appealing for potential buyers.
Have the right set of expectations
As great as everything about Walgreens looks to be, its stock isn't without risks -- nor is its business inevitably destined for success.
This isn't a stock that's going to beat the market every year, as it's unlikely to grow by very much. In short, to get the most mileage out of it, you're going to need to hold it for quite a long time, which will let the annual dividend hikes add up in your favor and drive down your cost basis. Of course, there's no rule that says a long-term dividend payer is going to be able to keep paying out.
While Walgreens' annual free cash flow (FCF) rose by 68.4% over the last 10 years, its total yearly long-term debt also grew by 66.5% in the same period, reaching $39.2 billion. In the 2021 fiscal year, the company spent $15.2 billion on debt repayment, but paid only $1.6 billion in dividends and reported only $4.1 billion in FCF. So investors should keep an eye on the company's FCF over time if they plan to buy shares, as a decline might eventually portend difficulty in meeting debt obligations and continuing the dividend.
Aside from dividend sustainability, there's also the issue of how the business will fare in its attempts to diversify into providing primary-care services at its pharmacies. Typically, it's reasonable to expect some compression of margins when a new (and significant) initiative is rolled out across a large organization like Walgreens. That might be an issue as there simply isn't much of a profit margin to compress.
Nonetheless, if you're interested in receiving a quarterly payout that's fairly likely to be stable, Walgreens is a decent option. It could play a helpful role in anchoring your portfolio's value if you have the time to wait for it to pay off.
