Pharmacy giant Walgreens Boots Alliance (WBA -0.23%) has paid shareholders for a long, long time; it's a Dividend Aristocrat -- and nearly a Dividend King -- with 47 years of steady dividend growth. But today, the stock's dividend yield is nearly 6%, its highest ever, implying the market is worried about the company's ability to keep paying.
But don't fear. The facts show strong evidence that investors, especially retirees, can buy Walgreens in confidence and continue cashing those generous dividend checks. Here is what you need to know.
Improving balance sheet health
Walgreens has a long history as a pharmacy store chain with roughly 8,900 retail locations across the United States. The stock's dividend growth streak, spanning nearly five decades, is a testament to its longevity. And its merger with Boots in late 2014 has now made it a worldwide company. That event also caused the company's debt load to swell, though that's steadily come down.
WBA Cash and Short Term Investments (Quarterly) data by YCharts.
You don't want a company to use debt to fund the dividend, but an unhealthy balance sheet could cause management to cut back on cash expenses like a dividend to free up more profits to pay down debt. You should look at a balance sheet like a safety net; you don't want to use it, but you'll be happy it's there if you ever do.
Cash profits fueling the payout
Instead, you want a company that generates enough cash profits to cover and raise the dividend all by itself. It's hard to raise a cash expense like a dividend 47 times without growing your bottom line! Fortunately, Walgreens is still doing very well on this front.
Walgreens is a tight-margin business; it sells prescriptions at low margins to get you in the door where you can buy food, snacks, health, and beauty products on which it makes more money. The company converts just $0.03 to $0.05 of every revenue dollar into free cash flow. Yet, Walgreens has grown its dividend and kept the payout ratio at less than 50% of cash profits.
WBA Cash Dividend Payout Ratio data by YCharts.
Like many companies, Walgreens has noted that increased wages and inflation-driven costs hurt its margins. However, it still has no problem affording the dividend, which has helped it address the balance sheet without sacrificing the payout.
Two big reasons to buy the stock
Walgreens shares are down nearly 50% from its high, which has caused the dividend yield to surge as the company keeps raising the payout. Now approaching 6%, the stock's yield is higher than at any point in its history:
WBA Dividend Yield data by YCharts.
However, the dividend is financially covered with cash profits and an improving balance sheet, so that 6% dividend should be a reliable return on your investment. That's great news for investors just looking for passive income.
What's more, management is working on adding medical services to its stores and implementing cost-cutting initiatives that could save the company $3.5 billion by the 2024 fiscal year. This could help grow earnings per share (EPS) at an annual rate in the low teens -- giving the stock a potentially quite attractive total return.
In other words, Walgreens could be an excellent investment for all investors, not just those chasing dividend income. Investors will want to keep an eye on the company's debt load to ensure it doesn't creep back up again, but the stock seems poised for healthy returns moving forward.
