Walgreens: A Dividend Aristocrat Paying 6.2% With Turnaround Potential

Summary

• WBA has struggled financially ever since COVID hit.
• WBA lost $3.64 in the last year, but is projecting earnings of $4.45 for 2023.
• WBA's Dividend Aristocrat status makes the 6% dividend look safe.
• Looking for a helping hand in the market? Members of Turnaround Stock Advisory get exclusive ideas and guidance to navigate any climate. Learn More »

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Overview

Walgreens Boots Alliance, Inc (NASDAQ:WBA) is one of the largest pharmacy companies in the world. In the past few quarters, it has struggled with the remnants of the COVID-19 fallout not to mention a $5.7 billion payout over opioid lawsuits filed in Texas and other states. However, if they can successfully put those trials behind them they are now positioned to regain their former market status.

If you look at WBA's total return over the last year compared to the S&P 500 (SP500), you can see it has struggled being down 25% compared to SPY's 6% increase.

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Going back four years to 2018 just prior to the COVID-19 outbreak, you can see a huge drop in the share price of over 60% from $84 to about $30 today.

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In terms of market cap, WBA is second in the world behind only fellow US drug store chain CVS (CVS).

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Keep in mind that Walgreens is a Dividend Aristocrat and has raised its dividend for more than 30 years in a row, an enviable record to be sure.

The question for investors at this point in time is, does Walgreens represent a reasonable investment return or should investors be on the lookout for better investment performance going forward?

In this article, we will look at WBA's prospects for the next year to try and determine the price direction out to 2024 as compared to the last year.

WBA Stock Key Metrics

Let's look at WBA's financial metrics comparing the latest TTM (Trailing Twelve Months) with the previous year. As might be guessed, there are many similar comparisons.

I use the financial metrics to discover what I consider to be positive investment numbers (yellow boxes) and compare them with any negative investment numbers (orange).

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One quick look at the financial metrics table above comparing 2022 to 2023 shows that WBA has some big positive comparisons if you are looking for a turnaround opportunity.

WBA's price (Line 1) is down 28% over the last 12 months and Price to Sales (Line 3) is down 30%. Despite those negatives, Net Debt is down 22% meaning WBA has made some progress in improving its Balance Sheet. The big negatives include EPS (Line 10) which went negative with the help of many write-offs and write-downs. But note that in the latest earnings call, CEO Roz Brewer projected earnings for the current fiscal year of between $4.45 and $4.65.

We are maintaining our full year guidance for adjusted EPS of $4.45 to $4.65 with good visibility into the key drivers of robust and accelerated growth in the second half. Importantly, the inflection is here.

Also, the Debt/EBITDA ratio (Line 14) was down 56% but still a reasonable 2.3x.

However, looking at FCF (Free Cash Flow) on Line 15 we see a large drop of 65%.

But note that if WBA comes anywhere near the earnings projections of $4.45 to $4.65, those numbers will certainly improve substantially.

So Walgreens had some very bad results over the last 12 months, but it looks like next year will be much better and that is why I like it as a turnaround opportunity.

What Do Analysts Think?

Wall Street and Seeking Alpha analysts are slightly positive about WBA but the number of analysts following Walgreens is limited. But note there are twice as many Buy recommendations as Sell recommendations but both are dwarfed by 17 Holds.

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The quant rating has been very consistent in the last year with a Hold rating for the entire twelve-month period.

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And recently Motley Fool rated Walgreens as a Sell due to its legal liabilities.

So based on the above ratings Walgreens seems to be Hold.

How Does WBA's Price Compare To Other Pharmacy Stocks?

A legitimate question when looking at any stock is to compare its potential with other stocks in the same market sector. If we look at WBA's performance over the last year and compare it to other large stocks in the pharmacy sector, we can see all three have had a miserable year. WBA and CVS are down 28% and Rite Aid (RAD) is down 67%.

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This would imply the pharmacy industry in general is waiting for something good to happen. Questions concerning recession, inflation, interest rates, and perhaps legal liability, have punished the entire group.

Is WBA Stock A Buy, Sell, or Hold?

Obviously, there are risks with a WBA investment. For example, if legal difficulties continue to be in the press through the end of 2023, WBA shares will almost certainly go lower. Add to those risks the possibility of a recession within the next year or so and you may have a precarious investment environment.

And in Walgreens's case, currency change fluctuations are always lurking on the horizon as can be seen in these comments taken directly from WBA's most recent 10K:

• The adverse impact of currency translation on sales was 6.9 percentage points.
• The negative impact of currency translation on pharmacy sales was 4.0 percentage points.
• The negative impact of currency translation on retail sales was 5.2 percentage points.
• The negative impact of currency translation on pharmaceutical wholesale sales was 8.9 percentage points.

Walgreens looks to me like it has a chance to improve earnings substantially this year and that should lead to a higher price. It also has a substantial 6% dividend yield and Dividend Aristocrat status.

I don't think it will get back to $80 but I can see it getting back to $40 by year-end for a nice 30% plus gain. It was over $40 last December.

This is certainly not a bet-the-farm type investment, it is an opportunity to make a nice profit due to an overly pessimistic market and pick up a safe 6% dividend while you wait.

I bought WBA at $30.90 and have placed a stop loss at $27.

WBA is a speculative buy.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of WBA either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Tiger80]

The problem with Walgreen is their business model is antiquated and with the same model and same ideas ; the stores profits will tank more. The abilityto change the Board and the CEO is limited. The profits and revenues do provide management salaries so their is inertia at this point and the shareholders are their least concern.Boots remains a problem. So you can hold Walgreen's . you can add to the position you have but regardless of the dividend the stock could move lower and the dividend could be cut. Walgreen's is a case of a company that is stuck in a different century.

[Fero.]

I missed the bottom today but I'm in at 28.64. Let's see how low this can go.

[Always Bullish]

Went on sale today. After carefully analyzing their future and the dividend yield and safety I’m adding shares

[Always Bullish]

Q3 eps miss and revised guidance 4.00 to 4.05 from 4.45-4.65. As Buffett has said we don’t know what we will earn next quarter or next year and the CEOs who who say they will make a number sooner or later may makeup the numbers. I appreciate the WBA honesty. The stock will sink probably 6% or more today and maybe more tomorrow raising the yield which has been raised for 47 years with a 5 yr Div growth rate of 4.67 giving me an annual “recliner raise”. Beats the heck out of working. It’s hard to be a value dividend investor but when you reach your mid 50s after investing faithfully for 30 years you’ll wake up and say: I don’t have to work anymore if I do not want to because my dividend income has exceeded my annual income perhaps my double. As Albert Einstein once said when asked what mathematically he learned in his lifetime that most valuable and it was magic of compound interest.

[Harry Sack]

@Always Bullish So you’re happy to lose ~10% because your dividend yield will go up?

Please say that’s not what you meant

[Fero.]

@Always Bullish you only get that dividend raise if you buy more shares for the current price. And then only for the newly acquired shares.

[Tiger80]

I look at retail pharmacies like telephone booths , eventually they will not exist. Walgreen's is the new Sears of the retail pharmaceutical industry. No really not true , but the company is making mistake after mistake. Maybe there will be a recovery in price at year end Buy.

[Cantankerous Cat]

1) Love the paying down of debt. 2) Fear the never ending opioid settlements.

[No Guilt]

Currency fluctuations, debt to equity rations… how about mentioning the elephant in the room, RAMPANT THEFT????

You know why they are surrendering and closing stores in San Francisco.

If they maintain 5% margins and somebody walks out stealing $20 worth of items then they need to ring up $400 worth of items to paying customers just to break even.

[Harry Sack]

@No Guilt well said.
Democrat policies at work.
Can’t even run a business anymore

[No Guilt]

@Harry Sack

Makes you want to rethink defunding the cops and a foreign Soros appointed DA that doesn’t prosecute the laws right?

[Hugh Jayness]

@Harry Sack, Can't run a country either !

[mlisacpa]

Great analysis, thanks. Cutting expenses and paying down debt are bullish signals. The CEO buying shares implies WBA has turned a corner. The highly expected recession looks more like a soft landing in progress. I will buy more shares if the price goes lower. I will take a risk to make a reasonable gain.

[Always Bullish]

This is the type of equity dividend deep value investors love. Especially when ROZ BREWER CEO took a huge position recently at about 34.50 a share. Thus my friends is the future of health care. It’s a dividend aristocrat and a Dow 30 gem that is in the bargain basement

[Harry Sack]

@Always Bullish WBA and “gem” should never be in the same sentence

[ns96nat]

@Always Bullish I don’t see Walgreens being a part of the Dow 30 much longer. I don’t see it paying it’s current dividend much longer either. Maybe getting booted from the Dow might spark that rally which may finally turn it into the gem we have all been waiting on. This stock has only been a value trap the last 4+ years.

Roz buying more shares looks good on the surface but that’s nothing more than her trying to save face given the sharp stock decline on her watch. Did other board members buy shares too? Was it a noticeable portion of her net worth or just more of a true-up payment from the company that she could use to buy shares on the open market with?
I hope your right. But the Walgreens I see is different from the Walgreens you see and I haven’t seen anything yet that’s going to get this stock out of the bargain basement, let alone keep it in the Dow and in an aristocrat status.

[Hugh Jayness]

Walgreen is suffering on two fronts, Brewer is a horrible CEO. Possibly the worst Wags has ever had. Shrink has exploded ( Not just at WAGS) but at every retailer, with the exception of Costco. Until some semblance of law & order returns, retailers are not the place to invest in.

[No Guilt]

@Hugh Jayness

How many of these retailers getting robbed with impunity supported defund the cops and the 6 months of insurrection around state capitols?

[robertlgriffin]

Bought WBA around $50, held a year and got out at $46. If earnings comes in at anywhere near $4.00/sh, the dividend payout would be right at 50%, so I may get back in at these prices.

[JoeMonte]

Excellent summary!

[The Dividend Collectuh]

I like Walgreens transition into a healthcare giant. I’m optimistic and going to continue to hold for the long term. I think they’re moving in the right direction 📈😊

[Tiger80]

The governments reimbursal rates on profit for prescription will hit Walgreen's hard. Also some prescription business will be lost to on-line pharmacies. Walgreen's still has an uphill battle. I would add smaller stores that have limited over the counter items and have turnstiles where you must swipe a form of personal identification before you enter store.There are so many Walgreen's stores in the U.S and really although it is a retail for profit organization it by its shear size and the number of people its stores serves can be considered a legitimate part of the health care system. The government did them wrong by suing them for filling opiates. They punished a store that serves the health needs of the public financially and mercilessly just to soak them for cash. They did this with the generic drug companies who they forced into bankruptcy and now they are doing it with Rite-Aid. The government talks about improving health care and yet they are destroying its foundation at the same time.

[weitermachen]

@Tiger80 you had me at "government"

[wdjax0n]

Will there be success from reverting stores back to one or two centuries ago: clerks got everything of any value from areas not accessible to customers (?) [finance.yahoo.com/news/chicago-walgreens-redesigned-only-2-143112453.html]. Off the wall ideas continue to emerge from the great thinkers running WBA.

[Former Wall Streeter]

@wdjax0n This locking up goods seems very limited to high crime areas based on my visits to stores in FL, IL, and NY, and talking with FL Walgreens employees who say it is limited.

[Tiger80]

@adambcohen Next step would be to tie all the customers who walk into the store with a chain, and than release them after they pay at checkout.

[wdjax0n]

@Tiger80 Only after their receipts are again validated at the exit; as some stores force on their customers even today.

[swells4613]

WBA’s stock price will not substantially improve until Brewer is replaced as CEO.

[Bikerron1]

I go back to when I would eat at their lunch counter. I've had many of great lunch's at WBA

[wam350]

@Bikerron1
In the late 40's, early 50's they were where travelers could go for a meal and be assured of the quality. Then along came Howard Johnson and other chains began to spring up.

[ellen2]

you didn't even mention the expanding healthcare segment.

[wildpitcher]

I'm not enamored with the business, long term, though. The front of the house is easily "Amazoned" and the pharmacy is at the whim of mail order and pharmacy benefits managers. I'll pass on it for a long term investment, but I could see it as a trade.

Dave

[Tiger80]

@wildpitcher You appear like a smart guy.

[Tiger80]

@Tiger80 The items they sell in their front end have too many competitors at lower prices. I shop there for laundry detergent, instant coffee, toilet paper and dish washing liquid, sale items only.