Many companies slashed their dividend payments this year, including top tech company Intel. Spending big money on growth led to an inevitable crossroads for the company that resulted in the tech giant deciding to trim its payouts so that it would have more cash available for growth initiatives.
One healthcare company that could find itself in a similar position is Walgreens Boots Alliance (WBA -2.89%). While its 5.3% yield looks mighty attractive right now, is this a dividend that investors can count on?
Why there's a risk for Walgreens' investors
It's tempting to look at Walgreens' stock and say that with a streak of increasing its dividend for 47 straight years, the payout should be a lock. But a reduced dividend is a possibility that investors shouldn't overlook.
That's because Walgreens is looking for ways to accelerate its growth via the recent launch of its U.S. Healthcare segment. It has opened hundreds of primary care clinics through an investment in VillageMD and plans hundreds more over the next few years. It spent $5.2 billion on an initial investment in VillageMD and pumped in another $3.5 billion when the primary care operator acquired specialty and urgent care business Summit Health-CityMD. When companies spend billions on growth initiatives as Walgreens has, that can put a strain on their cash flow.
The big problem is that Walgreens doesn't have a big buffer between its free cash flow and what it pays out in dividends. Last quarter, that difference was negative, meaning that the company paid more out in dividends than what it generated in free cash flow.
Fundamental Chart data by YCharts
If this continues, it could be a troubling trend for the business. At the very least, these are figures that investors should be paying close attention to in the future.
Is a dividend cut inevitable?
A dividend cut would be a drastic move for Walgreens to make. Not only would that destroy its streak of dividend increases, but it could mark a significant shift in priorities for the company, pivoting more toward growth and being less focused on the dividend.
In the past five years, Walgreens has already started to lessen its rate of dividend increases:
WBA Dividend data by YCharts
Last year, the company made a razor-thin increase to the dividend, from $0.4775 to $0.48, which is just a 0.5% increase. In 2019, however, the company raised its payout by 4%. And the year before that, it made a generous 10% increase.
If Walgreens tightens up its dividend "growth" anymore, it will have to start carrying a fifth decimal place when it announces its payouts.
Should you buy Walgreens stock?
Walgreens is still technically a dividend growth stock, but just barely. Unless the business drastically improves and starts generating more cash, these minimal rate hikes are likely to continue. And at this point, there's little reason to expect things will get better in terms of cash flow.
The healthcare stock can be a good contrarian pick, but only if you expect its healthcare venture to be successful -- it incurred an operating loss of $472 million for the three-month period ending Feb. 28 and has a long way to go to become profitable. If you're buying the stock primarily for its dividend, you could end up disappointed. While I don't think Walgreens will cut its dividend within the next year or two, it's a possibility that investors should prepare for, especially as it spends more money on healthcare expansion. Although it may look like a bargain, Walgreens is currently a risky dividend stock to own.
