Walgreens Boots Alliance (WBA +0.00%) is a top pharmacy retailer that millions of Americans trust and rely on for groceries and prescriptions. It got a boost from COVID-19 vaccinations and the traffic that brought into its stores. Although that demand has largely evaporated now, the company has been pivoting to primary care in an effort to bring in more customers.
The problem is that its business doesn't generate nearly enough cash to support that venture, plus pay dividends, plus pay down its debt. The company has been turning to the sale of its investment in AmerisourceBergen to help improve its cash position. And that's not something investors should be excited about.
Walgreens sold nearly 40% of its stake in AmerisourceBergen in the past year
On Aug. 3, Walgreens announced that it would reduce its position in drug wholesale company AmerisourceBergen with the sale of $1.85 billion worth of shares. With the sale, its stake in the business is now approximately 16%. In August 2022, Walgreens reported that it owned 52.9 million shares in AmerisourceBergen for a 25.4% ownership in the business.
In May of this year, Walgreens also sold $694 million worth of shares in AmerisourceBergen. And in December 2022, it also sold $1 billion worth of shares in AmerisourceBergen.
In all of those instances, the company said it would use the money to pay down debt along with other purposes, including funding growth initiatives. Although there's nothing necessarily wrong with reducing its ownership in AmerisourceBergen, Walgreens' financials haven't been in great shape of late, and relying on the sale of investments may not be a sustainable way to bolster its cash position.
NASDAQ: WBA
Key Data Points
Walgreens' operating cash flow hasn't been strong
A problem for Walgreens in recent years is that its operating cash flow has been declining, and so it may not come as a surprise that the company needs a way to bring in more money.
WBA Cash from Operations (Quarterly) data by YCharts
This is a concerning trend should it continue, as Walgreens needs cash to pay down debt, pay dividends, and invest in the expansion of primary care and its new U.S. healthcare business, where it has already invested billions.
During the nine-month period ending May 31 (its most recent earnings report), the company has spent the following:
- $7.1 billion on acquisitions and business investments.
- $5.2 billion on debt payments.
- $1.6 billion on capital purchases.
- $1.2 billion on cash dividends.
But the company's operating cash flow during that period was just $1.2 billion -- barely enough to cover just its dividend payments. And it still has over $8.8 billion in long-term debt on its books.
Walgreens has, however, been making moves to try and find ways to save costs, recently announcing that it has found another $600 million in cost savings. Unfortunately, until the company can show investors that it's in a much stronger financial position, it could be difficult to attract growth investors or convince dividend investors that the payout isn't in danger. Walgreens stock isn't only trading near its 52-week low; it also hasn't been trading this low in over a decade. Investors are concerned about the company's future.
Is Walgreens stock too risky to buy?
Investors are paying just 6 times earnings for shares of Walgreens, which is a hefty discount when you consider the S&P 500 average is more than 20. This is a potential value trap. Despite a high dividend yield of 6.5%, investors are clearly hesitant to buy shares of the stock.
Selling stock of AmerisourceBergen does look like a sign of desperation from Walgreens. The company isn't doing well enough on its own to support all of its outflows, and the share sales can help support its long-term goals. But it's simply not a sustainable long-term solution. Walgreens could make for a great contrarian buy, but the stock comes with plenty of risks, and most investors are better off simply avoiding the healthcare stock until it can show stronger operating cash flow.
