Among pharmacies, both Walgreens Boots Alliance (WBA +0.00%) and CVS Health (CVS 0.98%) are likely to be among the first that come to mind. Likewise, both companies are longtime dividend payers, and when paired with the relative stability of a retail pharmacy business, it's obvious why investors are interested in potentially making a purchase.
But you're likely to be a lot happier when you invest in one of these stocks rather than the other. Here's why.
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Walgreens' payout could be unsustainable
There's something that investors considering Walgreens as a dividend stock need to recognize right off the bat. It might need to slash its payout if its earnings continue to decline, and they probably will.
Its margins are under heavy pressure as a result of launching less profitable businesses to compete in primary care and specialty care services while yesteryear's growth segments fade. Its earnings per share (EPS) plummeted 20.3% in the second quarter of its current fiscal year compared to the same quarter a year ago, which management blames on decreasing demand for its coronavirus products and services.
NASDAQ: WBA
Key Data Points
That demand won't be returning. Even adjusted gross profits from its core pharmacy segment are falling, collapsing by 9.8% in Q2 compared to the prior year. And management is predicting that earnings will continue to contract in 2023 as fewer people need its coronavirus products.
At the same time, its sales over the last five years are stagnant, and there is little hope of significant near-term top-line growth as its new initiatives will take some time to pay off. To complicate matters further, it has $3.9 billion in current debt due within a year, and a total debt load of $38.5 billion. That implies a lot of future capital will need to go to debt repayment rather than getting passed on to investors or reinvested for further growth.
What's more, its dividend only grew by 4.9% over the last three years. The silver lining is that its forward yield is 5.5%, putting it significantly higher than the market's yield near 1.6%, but falling a bit short of being a true "high-yield" investment. So when considering slow growth, falling earnings, and plenty of debt, there's a fair amount of risk with this investment.
CVS isn't exactly a star dividend hiker either
CVS is a company that's a bit more stable than Walgreens despite competing in most of the same markets. Thanks to modest levels of growth in its retail pharmacy, pharmacy benefits, and health insurance segments, its top line rose by 10.4% year over year, bringing in a massive haul of $322.5 billion for 2022.
As its investments in expanding its health insurance segment come to fruition, it should be feasible for the company to maintain somewhere in the ballpark of mid-single-digit top-line growth for 2023 and perhaps beyond, per management.
NYSE: CVS
Key Data Points
But it could hardly be said to be printing money for investors. As a result of $5.8 billion in opioid-related litigation expenses and losses on its long-term care business, its operating income crashed 41.3% in 2022, reaching $7.7 billion. Its anchor retail pharmacy segment faces headwinds from rising reimbursement pressure and falling interest in its coronavirus diagnostics and vaccinations, similar to Walgreens.
In terms of its dividend, its forward yield is only 3.2%, which at first glance makes it a lot less juicy than Walgreens. Since 2013, CVS' dividends per share grew with an average annual rate of 13.7%. But that's a bit deceiving as it didn't grow its dividend at all between 2018 and 2020.
What that tells us is that management likely views increasing the payout as a bonus for when times are good rather than as a strategic priority regardless of the operating environment. Such a perspective is a smart one for the company's ongoing health. But it does make the stock a touch less appealing for dividend investors. There isn't any sense of certainty that the dividend will rise inexorably year after year, though actual cuts are probably off the table for the foreseeable future as its payout ratio is a relatively safe 70%.
There's a clear winner
Given Walgreens' fraught financial situation and CVS' relative sturdiness, CVS is the better dividend growth stock, even if it doesn't actually hike its payout like clockwork every year in the way that investors would probably prefer. While it's true that Walgreens' stock does have a much higher yield, there's not much point in investing for that yield if there's a question over its continued future.
Regardless, there are better dividend stocks out there than either of this pair, both in terms of the propensity to hike the payout and also in terms of broad-based growth that'll contribute to lasting financial stability.
