Walgreens Boots Alliance: A Promising Turnaround or a Fleeting Glimmer of Hope?
The pharmaceutical retail giant, Walgreens Boots Alliance (NASDAQ: WBA), witnessed a remarkable 27.5% surge in its stock price on January 10, 2024. While this significant gain is a welcome respite from the 64% decline the company experienced last year, investors are left wondering if this upward trend will continue.
A Dividend Yield That’s Hard to Ignore
Income-seeking investors, in particular, are drawn to Walgreens Boots Alliance’s impressive 8.5% dividend yield. However, it’s essential to examine the company’s latest report to determine if this yield is sustainable and if the stock is worth holding onto.
Better-Than-Expected Earnings, But Challenges Persist
During its fiscal first quarter, which ended on November 30, 2024, Walgreens Boots Alliance reported adjusted earnings of $0.51 per share, surpassing the Wall Street consensus estimate of $0.40 per share. The company also issued forward-looking guidance that was slightly more optimistic than anticipated. Despite these positive developments, the retail pharmacy chain operator still faces significant challenges.
The Pharmacy Benefits Management Conundrum
A report from the Federal Trade Commission highlights the dominance of three companies – CVS Health, UnitedHealth Group, and Cigna – in the pharmacy benefits management (PBM) space, managing 79% of prescription drug claims for 270 million Americans. These vertically integrated companies have a significant advantage over Walgreens, which lacks an integrated PBM. This disparity has led to declining margins in Walgreens’ U.S. pharmacy operation.
Competition from Low-Cost Providers
The rise of low-cost providers like Mark Cuban’s Cost Plus Drugs and Amazon Pharmacy has transformed the generic drug market into a low-margin business. CVS Health has responded by introducing its CostVantage model, which has added pressure on Walgreens to adapt.
U.S. Retail Pharmacy Sales Growth, But Margins Decline
Walgreens reported a 6.6% year-over-year increase in U.S. retail pharmacy sales during its fiscal first quarter. However, margins declined sharply, with adjusted operating income from U.S. retail operations coming in at just 1.3% of sales. This decline is a concern, especially since the company’s U.S. healthcare segment is still incurring significant losses.
A Tempting Dividend Yield, But Proceed with Caution
While the 8.5% dividend yield may be enticing, investors should exercise caution. Without a return to profitability, another deep dividend cut could be on the horizon. It’s essential to wait until Walgreens Boots Alliance’s bottom line is firmly in positive territory before investing.
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