Walgreens Boots Alliance (WBA +0.00%) slashed its dividend earlier this year. The company's earnings numbers haven't been great, and it is in the midst of launching healthcare clinics at its stores as part of a costly move into healthcare. It has been a tumultuous time for the pharmacy retailer, and investors can tell that just from its stock price: The last time Walgreens shares were trading at these levels was in the previous millennium.
There are signs of trouble for the business, and one of the biggest problems a company can face is with respect to cash flow. Walgreens is still paying a dividend, but the clock may be ticking on that. The company recently made a move to sell the last of its investment in drug wholesaler Cencora (formerly AmerisourceBergen). Is this just the latest sign that Walgreens has a big cash-flow problem?
NASDAQ: WBA
Key Data Points
Cash flow has been going in the wrong direction for Walgreens
Operating cash flow is one of the most important metrics investors can rely on when assessing the health of a business. If a company is struggling to generate positive cash flow from its day-to-day operations, that's potentially a huge cause for concern as it suggests the operations aren't sustainable.
There have been multiple periods within the past year when Walgreens burned through cash from its regular operating activities. And during the past five years, its cash flow has been trending in the wrong direction.
WBA Cash from Operations (Quarterly) data by YCharts
Cash flow can and does fluctuate, as is visible in the sharp change last quarter when it went from negative to positive. That's just the nature of business, as a big cash collection of receivables can suddenly increase cash flow. This is why the trend is arguably more important than an individual period. And the trend for Walgreens has not been good.
What exacerbates this issue is that the company is still paying a dividend. And while Walgreens did make a significant dividend cut earlier this year, even the reduced amount is still costing the company about $216 million per quarter. That's cash that can arguably be better used elsewhere.
The sale of Cencora stock will bring in about $1.1 billion for Walgreens, but it doesn't fix the problems the company is facing right now.
Walgreens' cash balance looks concerning
Another problem is that compared with its current liabilities, which stand at a whopping $25 billion, the company doesn't have a lot of cash and cash equivalents on hand. And while its current assets total more than $16 billion, that's also well short of its current liabilities.
WBA Cash and Equivalents (Quarterly) data by YCharts
You may look at the chart and say that technically Walgreens has been in this situation for the past few years, and it has been keeping its head above water. But when you combine this visual with the previous one, it reveals a potentially perilous situation. Not only are its liabilities high, but cash flow has been insufficient to cover day-to-day expenses in recent quarters.
Is Walgreens' stock too risky to own?
This isn't the first time Walgreens has sold some of its shares in Cencora. But given its troubling cash position, it isn't a development you should ignore. And more asset sales could be coming if Walgreens' financials don't improve. Even if you're a contrarian investor, you'll want to think twice about owning Walgreens stock.
If new Chief Executive Officer Tim Wentworth can turn the business around, it will be an epic accomplishment. He's been on the job for less than a year and has already made moves to cut costs and slash the dividend to help give the business some breathing room. But there's still more that needs to be done before investors can feel comfortable owning the stock. There are no shortage of challenges with Walgreens right now, but cash may be the biggest worry for investors.
Without some significant changes, and some improved results and cash-flow numbers, investors are simply better off steering clear of this healthcare stock.
