Walgreens’ Dividend Dilemma: A Risky Investment Ahead?
A Once-Safe Dividend Stock in Free Fall
Walgreens Boots Alliance, a pharmacy retailer, has seen its stock value plummet by over 80% in just three years. The company’s decades-long streak of increasing dividend payouts has not only come to an end but has also been slashed. As Walgreens struggles to recover, investors are left wondering if another dividend cut is on the horizon.
A Steep Dividend Cut and a Shift in Priorities
On January 4, 2024, Walgreens reported its first-quarter results and announced a 48% reduction in its dividend payout. This move was likely a shock to investors relying on the recurring income. However, the reality is that the dividend was unsustainable, and the company needed to take drastic measures to improve its cash flow.
A Focus on Cost-Cutting and Healthcare Growth
Walgreens is working to reduce costs and has seen improvements in its free cash flow. In two of the past four quarters, the company has generated positive free cash flow, and its free cash has been higher than its dividend payouts for two straight quarters. However, overall profitability remains a significant concern, with the company incurring operating losses in three of the past four quarters.
A Competitive Yield, But at What Cost?
Management’s goal of maintaining a “competitive yield” is admirable, but it may come at the expense of the company’s financial health. With the current yield over 10%, it could easily be cut in half again and still be considered competitive. Perhaps the best move for Walgreens would be to suspend its dividend payout and focus on fixing its operations before worrying about regular dividend payments.
A Risky Investment Ahead
Walgreens’ turnaround efforts make it an incredibly risky investment. Unless you’re a contrarian investor comfortable with potential significant losses, you may be better off seeking safer dividend stocks with more modest yields. While the stock may look cheap, trading at just six times next year’s estimated profits, it appears more like a value trap than a bargain buy.
A Word of Caution
Before investing in Walgreens Boots Alliance, consider the risks involved. The company’s discounted valuation may be tempting, but it comes with significant risks that investors should not overlook. Instead, consider seeking out safer dividend stocks with a proven track record of stability and growth.
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