Is Walgreens 8.5% Dividend Safe?

Last week, we covered CVS (CVS), lauding the company for its efforts to adapt to the changing environment.

Since then, the search volume for the 2nd place finisher, Walgreens Boot Alliance (WBA), caught fire, up nearly 100% in a week, according to our Trackstar data.

Maybe that’s because the company’s CEO and CFO recently stepped down…

…or it could be their $44 million settlement over Theranos fraud claims.

In any case, we wanted to take a deep dive into a company that boats an 8.73% dividend yield.

Fair warning – we think that’s in jeopardy.

Walgreens’ Business

With over 14,000 retail pharmacy stores worldwide, Walgreens is the largest drugstore chain in the world. 

Like most drugstore chains, they offer prescription drugs through their pharmacies combined with a general retail store format that sells everything from groceries to health and beauty products.

WBA segments its business into the following areas:

• United States (75% of total revenues) – Beyond filling prescriptions, this segment offers retail products under the Walgreens and Duane Reade brands, plus central specialty and mail services.
• International (21% of total revenues) – Operating under the Boots, Benavides, and Ahumada brands, this segment runs pharmacy-led health and beauty retail stores and even dabbles in pharmaceutical wholesaling in Germany.
• U.S. Healthcare (4% of total revenues) – A new kid on the block, this segment is investing in primary care services through VillageMD and Summit Health.

Source: Walgreens Investor Relations

The U.S. Healthcare segment is the company’s hope for the future.

Here’s how it works:

Walgreens Health – Walgreens’ own healthcare arm that offers both in-person and online healthcare services through licensed pros. They sell prescription drugs, OTC meds, and wellness products. 

VillageMD – Focuses on primary care with a network of over 600 doctors across the U.S. They operate as Village Medical and recently bought Summit Health-CityMD for $8.9 billion, adding 200 urgent care centers and 1,400 doctors. 

CareCentrix – Specializes in after-hospital care and home care coordination. 

So, while CVS is going after the insurance segment, Walgreens is entering the provider industry.

Management expects the U.S. Healthcare division to grow by 300% in a matter of years.

Financials

Source: Stock Analysis

Revenue growth has been virtually non-existent for WBA.

The traditional retail locations simply cannot compete with larger stores.

That’s also hurt the company’s gross margins, though those have contracted, in part, from the new ventures.

The free-cash-flow margin has gone negative, which is a concern along with the $36.5 billion in net debt and annual interest expenses of almost $600 million.

Plus, they’ve only generated $1.3 billion in operating cash flow in the last 12-months against a dividend payout of $1.6 billion.

That implies a haircut is coming.

However, management expects to capture $150-$200 million in synergies by 2026 and raised its transformational cost management program savings goal to $4.1 billion.

Valuation

Source: Stock Analysis

From a non-GAAP P/E standpoint, WBA is cheap. 

But on a price-to-cash flow basis, it’s fairly expensive, especially given its current cash and debt position.

As we pointed out, CVS trades at a lower price-to-cash multiple, as does Petmed Express (PETS).

It’s tough to say WBA is a value here without seeing their growth prospects.

Growth

Source: Seeking Alpha

Revenue growth isn’t expected to pickup much in the coming quarters, which is pretty much par for the industry.

But again, it’s all about cash. Can they increase cash flow in the coming quarters.

Profitability

Source: Seeking Alpha

Walgreens holds a decent gross margin. And management believes their investments will immediately return cash.

We’ll have to see about that in the coming quarters.

Our Opinion 7/10

Walgreens will likely go through a challenging period for the following year.

Despite management’s commitment to maintain that and the dividend, its investment grade rating is on the line.

With new leadership, we can’t say the dividend will be safe.

However, that’s not a bad thing.

Cutting out the dividend for just one year would do wonders for shoring up the company’s future.

Long-term, this stock is a steal or at least a decent investment.

Short-term, there could be a lot of pain.

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