Walgreens Boots Alliance (WBA +0.00%) got the bad news out early in 2024. The pharmacy company is cutting its dividend by nearly 50%. That ended a streak of 47 years of dividend growth.
That reduction will enable Walgreens to retain more cash to fund its growth and strengthen its balance sheet. Here's a look at whether now's the time to buy the beaten-down member of the Dow Jones Industrial Average, which lost 30% of its value last year compared to the iconic index's nearly 14% rise.
NASDAQ: WBA
Key Data Points
The end of an era
Walgreens had a rich history of paying dividends. The integrated healthcare, pharmacy, and retail company has paid dividends for 364 straight quarters (91 years). It had increased its payout for 47 consecutive years. That put it among the dividend elite and only a few years away from becoming a Dividend King (companies with 50 or more years of dividend increases).
While Walgreens had done an excellent job paying a rising dividend over the years, growth has slowed significantly. Technically, the company didn't increase its dividend in 2023. It has paid the same rate ($0.48 per share) for the last six quarters. However, its total payment in 2023 was higher than 2022's level due to a 0.5% increase in mid-2022, enabling the company to count last year toward its streak. Meanwhile, its growth rate has decelerated (2% in 2021, 2.2% in 2020, and 4% in 2019).
On top of that slowing growth, its slumping stock price caused its dividend yield to rise to more than 7.5%. That elevated yield suggested that investors thought it was at high risk of a reduction. That's exactly what has happened this year, with Walgreens cutting its quarterly payout from $0.48 to $0.25 per share (pushing the yield down to a still attractive 4.3%).
Deteriorating financials
The main factor driving Walgreens' decision to slash its dividend was its weakening financial profile. Its earnings and cash flow are falling, while its balance sheet is weakening.
In fiscal 2023, Walgreens produced about $2.3 billion in operating cash flow and $665 million in free cash flow. Operating cash flow was down more than $1.6 billion from fiscal 2022 due partly to a reduction in pandemic-driven contributions. That weighed on free cash flow, which was lower by $1.5 billion. With nearly $1.7 billion in dividend payments, Walgreens outspent its operating cash flow by $1 billion over the past fiscal year.
The company did bring in over $1.7 billion in cash through sale-leaseback transactions and another $4.5 billion from selling other assets, like its stake in Cencora. However, it used that money to help fund more than $7.3 billion of acquisitions to build its new growth engine in consumer-centric healthcare. As a result, its balance sheet has become a concern among credit rating agencies. Moody's downgraded its bond rating to Ba2, a non-investment grade or junk rating. Meanwhile, S&P Global cut its rating to the last notch before junk (BBB-).
More challenges ahead
Walgreens doesn't expect things to turn around anytime soon. While it anticipates its sales will grow by 1%-4% in fiscal 2024, it sees its adjusted earnings per share declining another 12%-20%. It expects headwinds like lower sale and leaseback activity, higher taxes, lower pandemic-related contributions, and weaker consumer spending to weigh on its results. That will offset the positives of its cost-saving initiatives and the early growth of its consumer-centric healthcare business.
The company also plans to continue simplifying its portfolio to reduce debt and fund its strategic initiatives. One option it's contemplating is an IPO of its U.K. pharmacy business, Boots. Future sales of non-core assets would help bridge the near-term decline in its free cash flow to help Walgreens strengthen its balance sheet and fund its expansion.
Meanwhile, the dividend cut will save the company about $800 million per year, which it can use to fund growth and strengthen its balance sheet. That will give it more breathing room while it waits for its strategic plan to start delivering earnings and cash flow growth.
A difficult but wise decision
Walgreens made the tough decision to cut its dividend, ending decades of growth. While that move likely stings, it makes sense given its deteriorating financials. The dividend reduction should help improve its financial profile in the coming quarters. That potential improvement makes the stock look like a compelling buying opportunity for those seeking a rebound candidate that still pays a decent dividend, especially given how cheap it has gotten in the past year.
