Walgreens Boots Alliance: Is it time to take this Dog for a walk?

Walgreens Boots Alliance NYSE: WBA is the ugliest dog of them all. This Dow stock fell 31% for the year, making it the worst-performing member of the index. The move put the yield near 8% and the value as good, making it an attractive play for value-minded income and Dogs of the Dow investors. However, the sustained decline in share prices, a decline that began in 2015, involved pricing in some difficult decisions, and one of them has become a reality. 

Walgreens Boots Alliance dividend was payable and came with a long history of annual increases, long enough to put it on track for Kingship, so it was no easy decision to cut the payment. However, because the company is amid a difficult turnaround and in need of flexibility, it is understandable. The board’s decision is intended to strengthen the balance sheet and improve the cash position, which is equally good for shareholders. After all, what good is an 8% yield if the shares are in a perpetual downtrend? 

“We are evaluating all strategic options to drive sustainable long-term shareholder value, focusing on swift actions to right-size costs and increase cash flow, with a balanced approach to capital allocation priorities,” said CEO Tim Wentworth.

Walgreens Boots Alliance cut its dividend by nearly 50%. The near $0.25 quarterly payment annualizes to about 27% of the earnings outlook, freeing up considerable cash. The payout is still worth nearly 4% to investors, so it is a solid payout considering the company’s 7X earnings multiple. Assuming the company can get back on track and effect a price-multiple expansion, it could gain as much as 30% on that factor alone. Its closest competitor in the retail sector, CVS Health NYSE: CVS, trades about several handles higher. Regarding the business cash flow, the dividend cut is worth about $200 million quarterly. 

Walgreens has a solid quarter; taxes take a bite

Walgreens had a solid quarter with revenue of $36.71 billion. This is up 10% compared to last year and outpaced the consensus by 450 basis points on strength in US Retail, International and the contribution from US Healthcare. However, the best news is in the cash flow and margin, which also outperformed. 

The company continues to report GAAP losses but has clearly turned a corner. The quarterly loss was less than a dime per share compared to last year’s $4.31 as legal costs fall out of the equation. The GAAP losses should end soon, with the US Healthcare segment expected to break even this year. 

The adjusted earnings are equally positive despite the 43% decline. The $0.66 is impacted by shifting consumer trends and a higher tax rate but still $0.02 better than expected and compounded by solid guidance. The company continues to expect margin pressure but reiterated the FY EPS outlook, whose mid-point is above the Marketbeat.com analysts' consensus forecast. Analysts expect earnings to fall about 16% this year but for sequential growth throughout the year and growth in 2025. 

Analysts could tip the scale for WBA shareholders

The analysts continue to Hold Walgreens Boots Alliance but have been lowering their price targets for the last 12 months. If that trend continues, it is unlikely that WBA shares will be able to rebound significantly in Q1 2024. As it is, the consensus assumes about a 10% upside for the market, but the lowest targets, which were recently set, suggest a 15% to 20% downside is possible. 

The price action is volatility in premarket trading following the release. An initial 3% pop evaporated, and the market traded flat compared to the prior session. A move lower is likely if the market can not gain traction now. In this scenario, the market for WBA shares may move down to retest the recent lows near $20. A bottom may play if support is confirmed at that level. If the market can gain traction now, critical resistance is near $28.60 or about 10% above current action.