Shares of pharmacy retailer Walgreens Boots Alliance (WBA +0.00%) are trading around their 52-week low. The stock has been declining after the company recently reported earnings. It has an inexpensive valuation and a high yield that now pays more than 5%.
Although the stock is a Dividend Aristocrat with a terrific track record, Walgreens's yield is higher than usual. This raises the question: Could the company's payout be in trouble, or is this an income stock worth considering for your portfolio right now?
NASDAQ: WBA
Key Data Points
What the latest earnings results say
At first glance, Walgreens looked like it had a rough quarter, with profits of $229 million for the period ending May 31, representing just a fraction of the nearly $1.2 billion it posted in the prior-year quarter. But the results weren't bad, as opioid-related expenses weighed down the numbers.
On an adjusted basis, the company's per-share profit from continuing operations was $0.96. That was down from $1.38 a year ago. But even with the decline, that's double the quarterly dividend of $0.4775 that Walgreens pays today. An arguably even more important metric, however, is free cash flow. And during the period, the company's free cash was below $1.3 billion, down 13% year over year. Still, that's easily sufficient to cover the company's dividend payments of approximately $420 million every quarter.
Should investors expect to see increases in the dividend?
Walgreens' dividend has an impressive track record. The healthcare company has paid dividends for 89 straight years, and its streak of increasing its payouts is now 46 years. For that kind of streak to come to a grinding halt, something devastating would likely need to have happened to the business.
Given the room in its free cash flow and its commitment to rewarding shareholders, it doesn't appear likely at this point that either streak is in danger right now. Last year, the company hiked its payouts by $0.01 (2.1%), and I would expect to see those types of modest rate increases to continue. Walgreens has been investing billions into building out primary care clinics at its stores, and so it does have a use for cash. While it can afford to increase the dividend, it also wants to prioritize expanding its business and strengthening its growth opportunities. Right now, it looks as though the company can continue balancing both.
Is Walgreens a buy?
Walgreens' dividend yield is great, but the business itself does come with some risk. Although the stock is trading at just seven times its future earnings, there hasn't been much revenue growth from the business in recent years. Its partnership with VillageMD to launch hundreds of primary care clinics at Walgreens' locations looks to be a key part of its strategy moving forward, and how it does on that front will determine which direction the stock goes from here on out. A positive note is that the company is bringing down expenses and projects that through its transformational cost management program, it will have found $3.5 billion in annual cost savings by fiscal 2024.
It's an uncertain road ahead for Walgreens, as a lot will depend on the success of the rollout of these clinics and its renewed focus on healthcare. However, it's a strategy I'm optimistic about. Anything that involves in-person interactions and avoids having to solely compete on price (and facing off against Walmart or Amazon) could make the business a sound investment in the future. Walgreens is a bit of a contrarian investment today, but it could pay off in the years ahead.
