Walgreens Boots Alliance (WBA 1.64%) is a dividend growth stock that currently pays an attractive dividend yield of 5.9% -- far higher than the S&P 500 average of 1.6%. The pharmacy retailer could be an appealing income investment because of the seemingly stable business it operates and its impressive dividend growth streak, which now stands at 47 years.
But the company has recently been pivoting to healthcare and spending billions on building out a new segment. Money is tighter and there's more risk around the dividend than there has been in the past. Last year, the company raised its dividend in July -- is that likely to happen again in 2023?
Can it afford to keep increasing its dividend?
Walgreens' low profit margin (typically no more than a few percentage points) means that there can often be significant volatility in its earnings if there is an unexpected expense. For example, it has incurred expenses linked to opioid-related claims that have shattered its bottom line, resulting in a $3 billion net loss for the first six months of fiscal 2023 (ending in August).
One metric that investors typically look at when evaluating the safety of a dividend is the payout ratio, and that hasn't been great for Walgreens in recent quarters:
WBA Payout Ratio data by YCharts
It can be difficult to predict how the business will perform and how much the payout ratio may improve. While Walgreens likely won't continue to face multibillion-dollar charges related to opioid settlements, the company has been spending billions on its U.S. healthcare segment and launching primary care clinics at its locations. Earnings growth is by no means a guarantee, and Walgreens has already been scaling back on its dividend increases in recent years.
The last payout represented an increase of just 0.5%
On July 13, 2022, Walgreens announced that for the 47th consecutive year, it would be raising its dividend payment. But at 0.5%, it amounted to less than a penny. Back in 2018, Walgreens was more generous with a 10% lift to its payout, boosting its dividend by $0.04 to $0.44. While the company's streak has been continuing, the size of its increases has been shrinking significantly over the years.
WBA Dividend data by YCharts
The question for investors to ask themselves is at what point is a dividend increase still really a dividend increase? If it's a 0.5% boost, or perhaps even less than that this year, then it's effectively almost as if the company weren't lifting its payout at all. For example, if you owned 1,000 shares of Walgreens, you would expect to collect around $1,920 in annual dividends based on its current quarterly dividend payments. If the company were to boost those payouts by 0.5%, then your dividend income would grow by approximately $10.
At that point, the increase would arguably mean more to the company than it would to the investor. By lengthening its streak, Walgreens gets one year closer to becoming a Dividend King, a title reserved for companies have been increasing their dividend for at least 50 consecutive years. For that reason, I suspect Walgreens will raise its dividend in July, just to keep the streak going. But investors shouldn't expect more than a nominal boost to the payout.
Should you buy Walgreens stock for its dividend?
Walgreens' dividend comes with some big risks, and it's not a stock I would invest in for the payout. The company is going to need more money for its healthcare segment, and it appears unlikely that there will be more than just minor increases in the dividend moving forward.
There are better, safer dividend stocks to consider than Walgreens. And with an uncertain road ahead, income investors shouldn't feel too comfortable with the payout, because if the company's financial situation deteriorates or it decides it needs to spend more money on growth initiatives, a dividend cut could be a very real possibility.
