Dividend Kings sometimes become synonymous with being safe investments. And that's for good reason as they have stellar track records of increasing their dividend payments for at least 50 consecutive years. It's an impressive achievement, which the vast majority of dividend stocks are nowhere near.
One stock that is close to achieving that status is Walgreens Boots Alliance (WBA +0.00%). If its dividend increases over the next couple of years, the pharmacy retail giant could join the exclusive club of Dividend Kings. But while that sounds great, here's why investors shouldn't really care about this milestone.
NASDAQ: WBA
Key Data Points
It's a potentially problematic strategy
A key reason growing companies don't pay dividends is because once you start making recurring payments, there's the expectation you will continue making them. A company may have a great year and think about paying back its shareholders via dividends. But then if it doesn't make the payment again in three months, it gives investors and analysts a reason to grow concerned about the business. After all, if it was doing well enough to pay dividends previously and not anymore, that might be a sign that it's doing worse.
Dividend growth streaks are even troublesome. There, the expectation is that the company will continue not only paying dividends, but also increasing them every year. It becomes a game, particularly when times are tough, of how a company can keep the streak going, without really making a significant increase.
When Walgreens announced it was increasing its dividend last year, it was the 47th consecutive year that it raised its payouts. But it was a modest 0.5% increase over the previous year.
Future dividend increases could be negligible
This year, Walgreens hasn't actually announced an increase to the dividend. But it technically didn't need to since the dividends it has paid out this year total $1.92 -- that's still more than $1.915 it paid out last year. The delta is due to the increase taking place in the middle of last year.
This means that Walgreens could theoretically wait until the last quarter of 2024 before raising its dividend, and it would still be able to say its dividend has increased from the previous year.
That's not unlike what oil and gas giant ExxonMobil did when it waited until the last dividend payment of 2021 to raise its payout. Before that, the company's last dividend increase was in 2019. The magic is in the scheduling of the increases: Exxon raised its dividend at the start of 2019, made no increases in 2020, and waited for the end of 2021 before increasing the payout. The end result is a rising total annual dividend in each one of those years.
As you can see, there can be a bit of strategy involved when companies focus on keeping their dividend growth streaks alive. In Exxon's case, it had to deal with low commodity prices due to the pandemic. Conditions have improved since then.
In Walgreens' case, however, the problem isn't a cyclical or temporary one. The company has incurred an operating loss in three of its past four quarters. Meanwhile, it's spending billions on rolling out its healthcare strategy in a bid to improve its growth prospects.
If Walgreens keeps its streak going, it'll likely follow Exxon's playbook. There may be increases, but they could be timed strategically, and they are also likely to be minimal. For investors, that means achieving the status of a Dividend King may not necessarily all that meaningful.
Walgreens isn't a dividend stock worth buying
Walgreens' 7.4% dividend yield looks impressive, but it comes with plenty of risk. Even if the company keeps paying it and even increasing the dividend, without stronger financials, it may only be a matter of time before there is a reduction to the payout. Investors are better off looking at other dividend stocks instead.
