With 47 consecutive years of dividend increases in hand, including one in January of this year, it's safe to say that Walgreens Boots Alliance (WBA 0.57%) isn't going to break its dividend-hiking streak on a whim. Right now, its forward dividend yield is near 5.3%, making it look attractive to investors seeking passive income. But there's not much point to investing in a company for the sake of getting dividend payments if the payout is going to get cut sooner rather than later.
If you plan to invest or to hold the stock, you owe it to yourself to consider the risks of Walgreens' dividend getting cut, especially in light of the company's recent financial difficulties, so let's take a deeper look at the issue.
Why there's reason to be concerned
It's easy to assume that Walgreens' core business is safe, as its pharmacies get a regular clientele from people who need their prescription medications. With a top line of $132.7 billion in 2022, it almost seems like it's too big and established of a business to suffer from financial problems that might drive it to slash its dividend. Its ongoing plans to expand into providing primary care at its retail locations also seem to suggest that it has a runway for further growth, and sufficient resources to undertake significant and perhaps even transformational attempts at organizational change.
But businesses can be massive without being profitable, and Walgreens has had a relatively thin quarterly profit margin over the last 10 years, with its average being about 2.6%. And when considering its debt load of $38.5 billion and its meager cash holdings of only around $1.8 billion, the company doesn't necessarily have that much room to falter before slashing its payout might be on the table.
The last five years saw the company's quarterly free cash flow (FCF) fall by 87% to reach $248 million. Perhaps the most compelling piece of evidence that Walgreens' dividend is at risk is in this chart:
WBA Dividend Per Share (Annual YoY Growth) data by YCharts
As you can see, while it's true that Walgreens has dependably hiked its payout every year for longer than the last decade, over the last 10 years the annual dividend growth has slowed to a crawl, with 2022's increase clocking in at a pitiful 1.7% over the prior year. If management anticipated the company to experience a better financial future in the medium or long term at any point since 2013, it would have likely opted to keep hiking at the same pace (or perhaps even increase the dividend faster) rather than cutting back on returning additional capital relative to prior years. There is no guarantee that a slowing of the rate of dividend increase foreshadows an actual cut, but it isn't a positive sign.
Plus, in early March 2023, Walgreens announced that it was selling most of its stake in Option Care Health for the purpose of paying down some of that debt using the $476.6 million in proceeds. That sale comes on the tail of selling off other assets, like its stake in Guangzhou Pharmaceuticals in December 2022 for around $150 million, and its earlier sales of AmerisourceBergen shares. In sum, it sold off $3.5 billion of its holdings between the fourth quarter of last year and now. Companies that aren't under financial pressure don't need to make massive and repeated sales of their holdings.
Why things aren't dire just yet
Walgreens doesn't look like it's in good shape, and a cut to its dividend is likely on the table at some point in the next few years. Even if it doesn't happen, it's reasonable to expect the pace of its hikes to remain at a crawl, or perhaps stall out entirely. There aren't too many catalysts for rapid growth anywhere on the horizon, as the company's ambitions to compete in the primary care market will face stiff opposition from more powerful competitors, like CVS Health.
It's probably best to avoid buying Walgreens stock at the moment, and if you have it, it could be worth starting to think about the conditions under which you'd want to sell it. Because it isn't about to completely stop making money overnight, there's still some time for management to figure out how to right the ship, and it can likely still buy more time by selling off assets. But without major changes, this stock's dividend is anything but a safe bet.
