For decades, investors have been able to rely on growing dividend payments from pharmacy retailer Walgreens Boots Alliance (WBA +0.00%). But earlier this year, the company announced that it would be suspending its dividend. And that comes a year after it slashed its payout.
Walgreens investors may be feeling jaded with these developments. Not only has the stock been an awful buy over the past five years (it has declined by more than 75% during that time frame), but the loss of dividend income means they no longer have a consistent stream of cash flow.
There are, however, three important lessons and takeaways, which may help prevent you from getting burned in a situation like this in the future.
NASDAQ: WBA
Key Data Points
1. Just because a company cut its dividend doesn't mean it can't again -- or suspend it
In January 2024, Walgreens announced it would be slashing its quarterly dividend by 48%, as new CEO Tim Wentworth said the move was made to strengthen the company's cash position and balance sheet. The temptation for investors may have been to think that with such a big cut to the dividend, surely another one may not be coming soon afterward.
And yet, just over a year later, Walgreens would make an even more drastic move -- suspending the dividend entirely.
There's no rule or pattern for investors to rely on here, as ultimately, what it comes down when evaluating the safety of the dividend is the company's overall financial performance; if it isn't good enough, it may force management's hand. And while Walgreens previously had an impressive streak of consistent dividend increases, that doesn't mean that future payouts will be safe.
2. Dividend streaks are nice, but they aren't predictors of future payments or increases
One thing dividend investors sometimes focus on is whether a company has a long track record of paying dividends. If it does, that's generally seen as a positive sign of stability. But the past doesn't predict the future. A stock that has performed well for years isn't a lock to do well in the future, nor is a company which has paid dividends for decades a guarantee to continue making payments.
Dividend payments are not a guarantee, and the mistake investors can make is to rely too much on track record. Walgreens' streak of quarterly dividend increases would ultimately hit 47 consecutive years, and the temptation may have been to assume that pattern would have continued for the foreseeable future. Instead, it has become perhaps the best example of why investors shouldn't rely on the past when choosing a dividend stock to buy.
3. There can be signs of risk well before a cut, such as a costly strategy or poor earnings
For investors following Walgreens' stock, it shouldn't have come as a big surprise that the company needed to make a change to its dividend, whether it was a cut or a suspension; an adjustment looked to be necessary. In its past two fiscal years (Walgreens' year ends in August), the company has incurred an operating loss of more than $1.5 billion. And before its new CEO came aboard, the company was in the midst of pursuing a costly healthcare strategy that involved opening hundreds of clinics across the country.
When you put that all together, it doesn't make for a terribly promising picture for the dividend. When a company is going after an aggressive growth strategy and doesn't have strong financials, a cut to the dividend or outright suspension may not be all that unlikely. Computer company Intel (INTC +13.79%) suspended its dividend last year under similar circumstances while it was trying to improve its financial position as it grew its foundry business.
Investors should always do a careful analysis of a stock's financials before relying on its dividend
While it may not always be possible to predict dividend cuts or suspensions, there are often some warnings signs for investors. If a company isn't doing well financially and its need for cash may intensify in the future, investors should think carefully about whether to rely on the dividend, as it may not be safe, regardless of how impressive its track record may be.
