Walgreens Boots Alliance (WBA 0.57%) hasn't given investors much of a reason to invest in the business these days. Limited growth, low margins, and unprofitable quarters sum up why this has been an underperforming stock in recent years.
One thing that likely still attracts investors is the dividend. At 7.2%, Walgreens' yield is incredibly high. And the company has also been increasing it for nearly 50 straight years. But could its impressive streak of dividend growth be in danger of ending this year?
Is Walgreens' dividend sustainable?
The big question dividend investors should be asking about Walgreens' payout is whether it's safe and sustainable. If it isn't, then there's little reason to invest in the stock for its dividend. After all, if you have no confidence in the quarterly dividend continuing, you may only end up setting yourself up for disappointment and stock losses down the road.
And there's a real concern that Walgreens' dividend isn't safe. Whether you're looking at cash flow or earnings, there isn't a whole lot of reason to be optimistic about the dividend. In two of the past three quarters, Walgreens has incurred an operating loss. And free cash flow has often not been strong enough to support the company's payouts. In the trailing 12 months, Walgreens' free cash flow has totaled just $141 million. That pales in comparison to the nearly $1.7 billion it has paid out in cash dividends during that stretch.
Even as Walgreens looks for ways to cut costs, its efforts may not be enough to support both its dividend and its goals for expanding out its healthcare business, which includes the launch of hundreds of primary care clinics across the country. Such a strategy is cash intensive and could put the dividend at risk.
Without a way for the company to inject some much-needed cash flow into its operations, it may only be a matter of time before Walgreens has to make a change with respect to its dividend payments.
Why I expect the dividend growth streak to end
This year will be a big test for the company. It will show investors whether the business is all-in on its growth plans or whether it's still going to try to focus on being a dividend growth stock. I don't believe it's going to do the latter, for multiple reasons.
First, the company no longer boasts about its dividend growth streak. When it announced its quarterly dividend in October, it only talked about paying a dividend for 364 consecutive quarters; there was no mention of increasing its annual dividend payments. It's a subtle omission, but dividend growth stocks are proud of their track records. And while Walgreens technically didn't increase its dividend in 2023, the total annual dividend paid was still higher than in 2022, and thus, the company could still claim that its dividend increased this past year.
Second, the company's cash position simply isn't strong enough. As noted, Walgreens isn't generating enough free cash flow to support both its growth and dividend for much longer, and something has to give. While it could raise its dividend by a fraction of a cent this year to keep the streak going, that only delays what looks to be the inevitable -- a dividend reduction. Barring a significant improvement in its financials in the near future, investors should brace for the reality that their payouts could be much lower in the future.
Third, the new CEO, Tim Wentworth, may be tempted to make a big move. With a new executive in charge, there's the opportunity to break with the old and start with a new, more defined strategy. The company can still offer a modest dividend for the sake of keeping its streak of paying dividends going, but the focus should be on long-term growth and making Walgreens a stronger business in the long run. My hope would be that with a new CEO, it's easier to start with a fresh approach.
Investors should hold off on Walgreens stock
Walgreens' business looks to be at a crossroads right now. And until there's clarity about its path forward, investors are better off taking a wait-and-see approach with the healthcare stock. If Walgreens clings to its dividend and remains focused on raising its payouts this year, I would avoid it like the plague.
But if the company slashes the dividend drastically and says the priority is growth and getting the business back to profitability, then it could make for an enticing contrarian investment (assuming you're OK with the risk).
Sitting on the fence and trying to balance both paying a high dividend and focusing on growth, however, is likely to lead to underwhelming returns for the stock as neither growth nor dividend investors may feel comfortable with that approach.
Ultimately, I expect that not only will Walgreens not increase its dividend payments this year, but it will also cut them. It's the best move for the business in the long run.
