Is Walgreen’s Dividend Worth It?

Inflation and high interest rates have pressured the retail industry as a whole, but drug stores have faced their own set of challenges. Pharmacies have struggled with slimmer drug reimbursements, the loss of revenues from COVID-19 vaccines and testing, and staffing shortages.

For those reasons, many drugstores have attempted to expand beyond their core pharmacy businesses. For example, Walgreens Boots Alliance (NASDAQ: WBA) opened doctor’s offices next to Walgreens pharmacies to drive synergies and expand into a full-scale healthcare company.

It’s a play that hasn’t been successful so far, and Walgreens took a steep net loss in its latest earnings release as a result.

Thereafter, Walgreens’ stock fell, and is now down 51% over the past year. After peaking at almost $100 per share in 2015, WBA has been on a downward trajectory ever since, and the stock currently trades in the mid-teens.

Despite the share price loss, Walgreens beat revenue and earnings estimates last quarter. That might lead some investors to wonder if the struggling pharmacy retailer is due for a turnaround. And there’s another attractive aspect, the dividend. Walgreens shares currently have an impressive 6.26% annual dividend yield.

Why Did Walgreens Boots Alliance Stock Drop?

There were some positive aspects emanating from the company’s 2nd quarter of fiscal 2024 earnings.

Walgreens’ revenue was up 6.3% year-over-year to $37.1 billion, which beat analysts’ $35.86 billion sales estimates by 3.41%. The U.S. retail pharmacy segment is still Walgreens’ core business, and it had $28.86 billion in sales in Q2, up nearly 5% from the same quarter last year.

Walgreens has over 8,000 drugstores in the U.S. that offer retail products like food items as well as prescription and over-the-counter drugs. The company said U.S. pharmacy sales were strong because of price inflation in branded medications, and a strong performance by Walgreens’ vaccine portfolio.

While sales strengthened, Walgreens took a hit to its bottom line due to the openings of primary care practices next to Walgreens locations (VillageMD). Walgreens shut down 140 VillageMD clinics and took a $5.91 billion net loss in Q2 as a result of a decline in its VillageMD investment.

Despite the losses, Walgreens leadership doesn’t believe it will have a significant impact on the company’s ability to move forward, and the pharmacy giant still believes the VillageMD strategy will pay off in the long run.

Though the Q2 net loss was a drastic step back from profitability in the same quarter of last year, diluted earnings per share came in at -$6.85. That was 45.75% better than analysts expected.

Despite the earnings beat, WBA share price has fallen by over 26% since the March earnings release. Management didn’t help matters by lowering the full-fiscal-year 2024 EPS guidance to $3.20 and $3.35 from previous guidance of $3.20 to $3.50.

Will Walgreens Stock Go Back Up?

The plan to turn things around has included a change in leadership. New CEO Tim Wentworth took the helm in October 2023 and some of his early initiatives included slashing prices and reducing Walgreens’ workforce. The company laid off 10% of its staff at its Deerfield, IL corporate headquarters.

It also closed 150 retail stores in the U.S. in 300 UK drugstores in the fall of 2023. In May, Walgreens announced it would slash prices on 1,300 items, including everything from vitamins to facial cleansers, in a move to accommodate long-suffering consumers.

“Walgreens understands our customers are under financial strain and struggle to purchase everyday essentials,” said Chief Customer Officer Tracey D. Brown, Walgreens’ president of retail. “We continue to be committed to our customers by lowering prices on over a thousand additional items, something we’ve been doing since October of 2023.”

While Wentworth has undertaken a massive revamp, it will likely still take some time for Walgreens to rebound. There are also concerns about the heavy competition Walgreens faces, as pharmacies have sprung up in Walmarts and grocery stores that meet customers where they are.

Analysts Ratings On Walgreens Stock

Because of the host of challenges facing Walgreens, Wall Street analysts have been hesitant to endorse the stock. Out of 21 analysts who have evaluated Walgreens, the consensus is to Hold WBA.

There are four buy ratings, however, including two forecasts that see Walgreens Boots Alliance shares outperforming the market.

The highest forecast has WBA jumping by over 119% over the next 12 months. The average price forecast is $21.98, which would still be a 37.5% increase from where WBA currently trades.

There are also four Sell ratings on the stock, including one analyst who believes WBA will underperform the market over the next years. The lowest forecast is $13 per share, an 18.6% decline from where the stock currently trades.

Is Walgreens Stock Undervalued?

Though analysts won’t call WBA a buy, the average price target indicates Walgreens shares have upside. That would appear to be confirmed by the stock’s price-to-sales ratio of 0.95x.

Competitor CVS, however, has a P/S multiple of 0.22. And while CVS has faced many of the same struggles as Walgreens, CVS stock is down just 11.6% in the past year.

However, CVS loses out to Walgreens on dividends. Walgreens has a 6.26% annual dividend yield compared to its competitor’s 4.33% yield. That amounts to a quarterly payout of $0.25 per share.

Is Walgreens Dividend Worth It?

While Walgreens has a strong dividend, it used to be stronger. The company slashed its dividend by 48% earlier this year in another move to save capital that management hopes to use to grow its pharmacy and healthcare operations.

The move should concern dividend investors because if Walgreens continues to struggle the company could cut its payout further or eliminate it entirely. That means WBA investors need to seriously consider whether they think the ailing retailer can turn it around.

While that may still happen, it will take some time for Wentworth to solve Walgreens’ issues. In the meantime, dividend investors are likely to find better opportunities elsewhere.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.