Walgreens Boots Alliance (WBA 0.57%) pays an incredibly high dividend yield. It's also trading near lows it hasn't seen in years. That's because the business is facing some significant risks as it's no longer getting a boost from COVID vaccine traffic and its financials are hurting. In the midst of all this, the company has a new CEO, Tim Wentworth.
There's a lot for investors to unpack when it comes to Walgreens Boots Alliance. Below, I'll outline the bullish and bearish cases for investing in the stock, and whether it's an investment you should consider adding to your portfolio today.
The bullish case for Walgreens Boots Alliance
One of the biggest reasons investors may be bullish on Walgreens' stock these days is its incredibly low valuation. Just when you think the healthcare stock can't get any cheaper, it finds a way to go lower. Shares of Walgreens haven't been at their current levels in more than a decade. At 6 times earnings, the stock is either a deep value buy or simply a value trap.
For bullish investors, it's a value buy. That's because Walgreens is a top pharmacy retailer in the U.S., with a strong brand that people have come to know and trust. It is also building on its trusted brand and branching into primary care as it launches hundreds of clinics at its stores. This year, it has also launched virtual healthcare services to build on its healthcare expansion.
Walgreens' core business is also fairly stable, with the company normally reporting north of $30 billion in quarterly revenue. The stock offers an incredibly high dividend that yields 9.6%, which can provide investors with a significant source of recurring income. It has also increased its dividend payments for decades.
Bullish investors will have you believe that buying the stock today could be a tremendous opportunity to lock in a great dividend and set yourself up for some massive long-term gains as the business grows and the stock rises in value.
The bearish case for Walgreens Boots Alliance
Investors also have plenty of reason to be skeptical about Walgreens' stock, despite its hopes for building a robust healthcare business. The most glaring concern is the company's lack of profitability. Walgreens has incurred an operating loss in four of its last five reported quarters.
An even more concerning problem, however, is that the company's cash balance may not be strong enough to cover both its growth objectives and the dividend. As of the end of August, the company had $739 million in cash and marketable securities on its books. Meanwhile, over the past year, it has spent more than $2.1 billion on additions to plant property and equipment and another $1.7 billion on paying dividends.
That's fine if the company generates plenty of cash flow, but Walgreens doesn't. Over the past 12 months, its operating cash flow totaled $2.3 billion. The company has been selling investments to free up cash, but ultimately it isn't a sustainable strategy for Walgreens to pay its current dividend and pursue an ambitious growth strategy.
The high dividend yield is also indicative of investor sentiment, as it implies they are wary of trusting that high a payout. Otherwise, they would be scooping it up in a hurry, the stock price would rise, and the yield would come down. But that isn't happening. Instead, investors continue to remain bearish on the business, waiting for something big from the new CEO. Whether it's a change in the healthcare strategy or the dividend policy, at some point something has to give.
Walgreens is too risky a stock to buy
Shares of Walgreens are down 46% this year, and for good reason -- this is a risky stock with an uncertain path forward. The company's financials look abysmal, and Walgreens' growth strategy may only prove to be a money pit in the long run. There isn't a clear path for the company to turn its business around, and until that changes, investors are better off avoiding the stock.
