The market is angry with Walgreens Boots Alliance (NASDAQ:WBA) today, but is this a textbook example of a wrong reaction? I am bullish on WBA stock and invite you to consider whether Walgreens Boots Alliance is actually making a reasonable move and investors are drawing the wrong conclusion.
Don't Miss our Black Friday Offers:
- Unlock your investing potential with TipRanks Premium - Now At 40% OFF!
- Make smarter investments with weekly expert stock picks from the Smart Investor Newsletter
Walgreens Boots Alliance, usually just called Walgreens, operates a well-known retail chain of drugstores in the U.S. It’s probably the most famous American drugstore brand, though the company just can’t seem to catch a break lately.
For example, Barclays (NYSE:BCS) initiated coverage on WBA stock with an Underweight rating (equivalent to a Sell rating) and a $21 price target a couple of days ago. That’s the least of Walgreens’ problems, though, as the company just announced a move that investors aren’t very happy about – yet, perhaps this is a blood-in-the-streets moment that contrarians ought to relish.
Why is WBA Stock Tanking Today?
Sometimes, the market chooses to ignore good news and instead completely focuses on news that it doesn’t like. Today, there’s a prime example of this, as WBA stock plunged 10% soon after the opening ball rang on Wall Street, although it has recovered a bit since then.
I immediately went on social media and found the usual alarmists falsely declaring that Walgreens is going bankrupt. Thankfully, I also referred to TipRanks to get the real story of what’s going on with Walgreens and why people are panic selling their WBA shares.
There’s a good-news, bad-news situation happening with Walgreens, and I’ll mention the seemingly bad news first. Reportedly, Walgreens announced that the company is reducing its quarterly dividend by 48% to $0.25 per share. That’s after maintaining a quarterly dividend payout of $0.48 for more than two years.
This will require stock traders to readjust their dividend yield calculations for Walgreens. If the WBA share price is around $24 and the company pays $1 (4 x $0.25) per year in dividends, then Walgreens’ new forward annual dividend yield (assuming no changes in the coming year) would be $1 / $24, or around 4.2%.
That’s still a pretty good dividend, as the average healthcare-sector forward annual dividend yield is around 1.5%. So, even if Walgreens’ investors won’t be spoiled by a 7%-or-greater annual yield anymore, they’ll still have access to a decent source of passive income.
Don’t Ignore Walgreens’ Good News
Besides, the news isn’t all negative. First of all, Walgreens’ management had specific reasons for cutting the company’s dividend. Walgreens CEO Tim Wentworth explained that the purpose of the dividend reduction is to fortify the company’s long-term balance sheet and cash position.
Wentworth added, “This action reinforces our goal of increasing cash flow, while freeing up capital to invest in sustainable growth initiatives in our pharmacy and healthcare businesses.” In other words, while passive-income investors won’t be happy about Walgreens’ dividend cut, this move can help the company shore up its financials.
Thus, investors can take a glass-half-full perspective of Walgreens’ dividend cut. Besides, this wasn’t the only news item, as Walgreens also reported its first-quarter Fiscal Year 2024 financial results.
Oddly enough, the market seems to be ignoring Walgreens’ positive results today. In particular, the company’s Q1-FY2024 revenue grew by 10% year-over-year to $36.7 billion and beat Wall Street’s consensus estimate of $34.9 billion. Moreover, Walgreens posted earnings of $0.66 per share, surpassing analysts’ consensus call for $0.62 per share.
Finally, I should mention that not everyone is freaking out about Walgreens’ dividend cut. For instance, RBC Capital Markets analyst Ben Hendrix stated that he was “pleased” by Walgreens’ dividend reduction. “A dividend cut is prudent at this time,” Hendrix opined.
Additionally, Evercore ISI analyst Elizabeth Anderson estimated that the company’s dividend cut should save Walgreens approximately $800 million per year. Hence, it’s definitely possible that the market will see the wisdom of Walgreens’ dividend reduction sooner or later.
Is WBA Stock a Buy, According to Analysts?
On TipRanks, WBA comes in as a Hold based on two Buys, six Holds, and two Sell ratings assigned by analysts in the past three months. The average Walgreens Boots Alliance price target is $25.33, implying 6.6% upside potential.
If you’re wondering which analyst you should follow if you want to buy and sell WBA stock, the most profitable analyst covering the stock (on a one-year timeframe) is Lisa Gill of JPMorgan Chase (NYSE:JPM), with an average return of 27.54% per rating and an 89% success rate. Click on the image below to learn more.
Conclusion: Should You Consider WBA Stock?
Walgreens Boots Alliance is a leader among U.S. retail pharmacy chains. The company isn’t going bankrupt, and Walgreens actually just posted Street-beating top- and bottom-line quarterly results.
Also, Walgreens’ dividend cut, while seemingly drastic, might be viewed as a smart move in the long run. When the dust settles, Walgreens will remain intact, and investors will adapt to the reduced dividend yield. Meanwhile, contrarians should seriously think about the opportunity that the market is offering to them right now. In the final analysis, I am definitely considering WBA stock today for a long position.
