Walgreens Boots Alliance (WBA) will likely suspend its dividend entirely, and investors should thus not trust its current payouts. Despite the nosedive in shares of the pharmacy retail giant, which has pushed its yield to a seemingly attractive 13%, I believe the associated risks remain huge. After last year’s dividend markdown, another cut—or even a total elimination—appears likely. In fact, the stock’s 51% plunge over the past year highlights investors’ growing skepticism about the company’s ability to survive its current struggles. Consequently, I am bearish on Walgreens and urge income investors to avoid this stock.
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Walgreens’ Massive Debt Load Is a Burden
If you have not been following Walgreens’ challenges, let me explain why I am bearish on the company. Its overwhelming debt load is a massive anchor that is dragging down its financials and eroding investor confidence in its future outlook. Specifically, the company’s lease-adjusted net debt currently sits at $27.6 billion, and this kind of financial strain raises serious doubts about its ability to turn things around.
Despite efforts to control this load—including a net debt reduction of $1.9 billion and a lease obligations reduction of $1.2 billion during Fiscal 2024—Walgreens’ liabilities remain staggering. The lease-adjusted net debt ratio of 3.6x is notably high, especially for a company whose profitability is declining quarter after quarter.
Managing such a tremendous debt load has become daunting at this point, and Walgreens’ efforts to deleverage seem insufficient given its struggling operations. The company is also dealing with intense competition, falling sales in non-pharmacy retail, and ongoing reimbursement pressures in its pharmacy operations. The huge debt combined with these headwinds has, therefore, formed a perilous situation that, in my view, even threatens Walgreens’ prospects of remaining a viable business in the coming years.
WBA’s Struggling Profitability Raises Concerns
As I mentioned, I’m bearish on Walgreens, and the company’s declining profitability only reinforces my concerns about its sustainability, especially given its massive debt obligations. At first glance, the company’s Fiscal Q4 and full-year results might seem impressive, with record revenue of $147.7 billion in Fiscal 2024. However, a closer look at its profitability metrics tells a more troubling story.
In particular, the U.S. Retail Pharmacy adjusted operating income margin for the full year came in at just 1.5%, marking a drop of 140 basis points year-over-year. The International Pharmacy operations also had a tough time, with adjusted operating income margins of only 3.4%, down 80 basis points year-over-year. These figures highlight Walgreens’ ongoing challenges in sustaining profitability caused by mounting costs and increasing reimbursement pressures, as I noted earlier.
In the meantime, Walgreens’ GAAP operating cash flow for the year was a mere $1.0 billion, which is quite troubling given Walgreens’ lease-adjusted net debt of $27.6 billion—more than 27 times this cash flow figure. The company has attempted to stabilize its pharmacy margins by renegotiating contracts with Pharmacy Benefit Managers (PBMs) and implementing cost-cutting initiatives. However, these measures have yet to yield meaningful improvements in profitability, effectively leaving Walgreens with dwindling cash flows and mounting liabilities.
Walgreens’ Dividend Cut Appears Imminent
Let’s take another look at Walgreens’ dividend, which only deepens my bearish stance on the company. Even after last year’s significant dividend cut from $0.48 to $0.25 per share, Walgreens is still struggling to sustain its dividend. The company’s annual payout of $1.26 billion actually exceeds its operating cash flow of $1.0 billion, which signals a serious problem. Walgreens is paying out more than it earns, which stretches its already strained finances. With a huge debt load and a balance sheet under pressure, this unsustainable dividend only reinforces my concerns about the company’s ability to turn things around.
Therefore, I believe that investors drawn to Walgreens’ 13% yield should reassess and consider the red flags: a deteriorating balance sheet, shrinking profitability, and persistent expense pressures. Although Walgreens had a storied history of 47 consecutive years of annual dividend increases prior to last year’s cut, its investment case has since shifted dramatically. Despite its past track record, a complete dividend suspension has become crucial for meaningful deleveraging.
Is WBA a Buy, Hold, or Sell?
Wall Street analysts seem to have mixed feelings about Walgreens’ future prospects. Specifically, WBA stock features a Hold, with recent analyst ratings consisting of two Buys, seven Holds, and three Sell ratings over the past three months. Nevertheless, at $13.67, the average WBA price target implies a 52% upside potential.
For the best guidance on buying and selling WBA stock, look to Lisa Gill. She is both the most accurate and most profitable analyst covering the stock (on a one-year timeframe). Although she has a negative average return per rating due to WBA’s poor share price performance, she still has a success rate of 57%.
Key Takeaway
In summary, Walgreens faces a precarious future, burdened by an unsustainable debt load, declining profitability, and intense market pressures. Despite its high dividend yield appearing attractive on the surface, the company’s fundamentals clearly indicate otherwise, with cash flows insufficient to support payouts and meaningful deleveraging simultaneously. For income-focused investors, this setup raises red flags. Until Walgreens demonstrates a significant turnaround, including handling its debt and profitability challenges, I think the stock’s investment case remains highly speculative.
