Pharmacy chain Walgreens Boots Alliance (WBA -1.18%) has had a tough go of it. The stock's fallen more than 60% from its high, and the company kicked off its fiscal 2023 year with first-quarter earnings that disappointed Wall Street. Usually, you don't want to seek out stocks with problems during a bear market as negative sentiment can keep pushing share prices lower.
But at some point, enough is enough. Could Walgreens keep going lower from here? Sure, but long-term investors could be getting an opportunity to acquire shares on the cheap. Meanwhile, the stock pays a healthy dividend, and the company is taking some promising steps investors should know about today.
Here is why Walgreens could be one of those buy-the-dip stocks you need to check out.
Transitioning to the future
You probably know Walgreens for its self-branded pharmacy stores. Shoppers can fill their prescriptions and also purchase packaged foods, over-the-counter medicines, and cosmetic goods. There are approximately 9,000 stores in the U.S., not counting the nearly 4,000 Boots stores in the U.K., Mexico, Chile, Thailand, and the Republic of Ireland. The company's annual revenue tops $132 billion.
But the business operates on razor-thin profit margins. It converts less than 5% of its revenue into free cash flow, and that has worsened since the COVID-19 pandemic. That's not much financial breathing room in a competitive healthcare industry.
Now, Walgreens is using its massive store network to build a healthcare segment that can provide primary care and aid through its store locations. The company has invested billions in building this segment, which could generate up to $16 billion in revenue by 2025. The segment is nascent and expanding, so it's not yet profitable; there were a total of 393 clinics as of the end of November.
But management is targeting EBITDA to turn positive this year and to hit $1 billion in fiscal 2025. Remember that these are goals, so there's execution risk involved. Investors should monitor the company's U.S. healthcare segment for clues to its progress over the coming quarters.
Analysts are counting on at least some success, and estimates call for annual earnings-per-share growth averaging 5% over the next three to five years. If Walgreens' vision of a dual-purpose (store/clinic) model works, the company will have found a way to help protect its legacy retail business and build more revenue streams into its stores.
Pricing risk into the stock
A company making a drastic business change (and investing billions into it) is a risk -- even if investors agree it's necessary. If the stock were trading at a lofty valuation, that risk might turn one away. However, the risks of Walgreens' significant changes are already factoring into the share price. The stock averaged a price-to-earnings ratio (P/E) of 21 over the past decade but sits at just 8 today.
WBA PE Ratio data by YCharts
In other words, Walgreens could stub its toe and see its profits cut in half -- and the stock's still cheaper than it's typically been in the past. But remember, the analyst community is far more optimistic than that, predicting 5% annual earnings growth. Walgreen must deliver the goods, but investors arguably have a margin for error if it comes up short of expectations.
Get paid to wait it out
Long-term investors are looking years down the road, but that doesn't mean they won't benefit in the short term. Walgreens is a strong dividend stock that's paid and raised its dividend for 47 consecutive years. Moreover, the dividend yield is 5.2% at the current share price, which is at the high end of its historical range. In other words, investors can get a higher dividend return than most investors in the past, resulting from the pessimism around the stock.
Investors should do all their homework on Walgreens or any stock they consider buying. Still, it looks like Wall Street might overlook this old, dull, but consistent dividend stock with big plans to reinvigorate its business. The stock can likely deliver 10% annual investment returns through growth and the dividend alone if it hits analyst estimates. Adding its tremendously discounted valuation could seal the deal in making Walgreens a stock to buy on the dip.
