Walgreens Boots Alliance (WBA +0.00%) stock is trading at a 52-week low and its dividend yield is up to 6.4% right now. That's a mouthwatering payout for investors that can lead to significant recurring income for your portfolio. But before you consider investing in the pharmacy retailer for its dividend, there are three things you need to consider.
Its dividend has been growing very slowly
Walgreens is a dividend growth stock and has increased its payouts for 47 consecutive years. A few more rate hikes and it will join the ranks of the Dividend Kings, which have streaks that span at least 50 years.
But while Walgreens has been consistently increasing its dividend, it has been at a fairly modest rate over the past five years. From a quarterly dividend of $0.40 five years ago, it is at $0.48 right now, rising by 20% during those years and averaging a compound annual growth rate of 3.7%. It's a modest rate of increase and it has been slowing down; the company's most recent hike was just 0.5%.
WBA Dividend Per Share (Quarterly) data by YCharts
Free cash flow has been insufficient to cover the dividend
Not only has Walgreens posted a loss in two of the past three quarters, but during that time its free cash flow has also been lower than what it has paid out in dividends. That can be a concerning sign that the company may not be able to support its dividend for long.
This is especially problematic as the company pours more money into expansionary efforts, launching hundreds of primary care clinics at its locations. Balancing growth and dividends can be difficult, and in Walgreens' situation it raises a big cloud of uncertainty as to whether the company can continue paying its current rate of dividends, let alone continue increasing its payouts.
Fundamental Chart data by YCharts
A $642 million arbitration charge could weigh on its plans
Walgreens is currently fighting a $642 million award an arbitrator granted to health insurer Humana in a drug-pricing dispute where Humana says it has been "significantly overcharged."
In light of the pharmacy retailer's poor cash flow and lack of consistent profitability, any unexpected expense can throw a wrench into its financials. Another example is the settlement it recently reached with several states for its role in the opioid crisis, in which it promised to pay $5.7 billion over a period of 15 years.
The company's financials don't leave much room for surprise expenses, and even one-time charges such as these can have a drastic impact on Walgreens' dividend and growth plans. There are already signs the business is under pressure to free up costs, with Walgreens recently announcing it will be laying off 10% of its corporate workers.
NASDAQ: WBA
Key Data Points
Hold off on buying Walgreens stock
In the past 12 months, shares of Walgreens are down more than 30% and the stock has recently hit a fresh 52-week low. For dividend investors, there's a bit too much risk around the business at this point for it to be a good buy.
While it's tempting to rely on Walgreens' decades-long track record of payout increases, that doesn't mean the streak will go on forever. The company is facing some serious challenges right now, and even if you are interested in buying the stock, the safest option right now is to wait. See how it performs in the next few quarters, and whether its bottom line can improve and if its free cash flow can recover.
Without stronger financials, it may just be a matter of time before the company's dividend growth streak comes to an end, or worse -- Walgreens ends up cutting the payout.
