Can Walgreens Boots Alliance Potentially Generate Wealth for Millionaires?
Can Walgreens Boots Alliance Potentially Generate Wealth for Millionaires?
Walgreens Boots Alliance (WBA, dropping 3.37%) is a well-known player in the healthcare sector, with customers around the globe frequenting their local pharmacies for generations. However, the company has hit some rough patches lately. Failed expansion attempts caused its balance sheet to crumble, resulting in a 90% decrease from its previous high.
Rejuvenation efforts are underway, with management focusing on shedding debt and boosting the chance of income growth restoration. Presently, the stock offers an enticing 11% dividend yield, making it an attractive proposition for investors, potentially even a million-maker if Walgreens recovers.
However, is such a recovery achievable? Or has the market left Walgreens behind?
What led to Walgreens' decline, and what measures is the company taking to address its issues?
Walgreens Boots Alliance ranks among the world's largest pharmacy companies. Interestingly, the prescriptions that consumers obtain from a Walgreens (Boots in the UK) store serve as a significant draw, leading people to shop for other items like retail goods, food, and beverages. In 2024, the company generated roughly $116 billion in revenue from its U.S. pharmacies alone, but profits only amounted to $2.1 billion—a meager 1.5% margin.
The competitive landscape has become more challenging, with new entrants threatening traditional pharmacies with mail-order and e-commerce services. For instance, CVS Health acquired health insurance behemoth Aetna in 2018. Rather than adopting a similar strategy, Walgreens pursued expansion into care services, an expensive and acquisitive initiative that eventually burdened its balance sheet.
Now, the company is taking a more aggressive approach to cost-cutting. Management is leveraging its financials and trimming expenditures by closing underperforming stores:
The worst may soon be behind us. Walgreens reported earnings of $2.88 per share in 2024 and forecasted a decline in 2025 earnings to $1.40 at the lower end. However, experts estimate the company will grow earnings by around 5% per year over the following three to five years, hinting at a turnaround and eventual earnings growth resurgence.
Will the stock deliver substantial returns? A note on the dividend
Given Walgreens' projected earnings growth, its investment proposition appears compelling at face value.
Walgreens trades at a relatively low forward P/E ratio of approximately 6 and a PEG ratio of 1.1. This suggests that the stock's valuation is reasonably attractive, potentially yielding investment returns in line with the company's earnings growth and dividend yield, roughly 16% annually.
However, the dividend plays a crucial role in this scenario, given its substantial impact on the stock's hypothetical returns. Companies determine their dividend amount, but the stock market determines the dividend yield. Although sky-high yields often suggest trouble within the business, a confident market would typically invest in the stock at a higher price, resulting in a lower yield.
Given Walgreens' difficulties, investors must be cautious regarding the dividend. The current dividend per share of $1.00 is around 70% of the company's projected earnings for 2025. Furthermore, during the Q4 earnings call in October, management did not commit to maintaining the existing payout.
Is Walgreens Boots Alliance a golden opportunity awaiting investors, or should they steer clear?
Walgreens could be a compelling deep value stock, provided it manages to recover successfully. However, a million-maker prospect appears doubtful.
The traditional brick-and-mortar business model that Walgreens relies on has been criticized as outdated, with competitors now able to deliver products directly to consumers. While neighborhood pharmacies might not vanish completely in the immediate future, the reasons behind Walgreens' store closures are telling. The dividend also appears vulnerable to reduction, especially considering Walgreens' ongoing efforts to revitalize its financial situation following credit agency downgrades to speculative (junk) status. A dividend cut would likely result in unexciting growth and total returns for investors.
Additionally, reports indicate that Walgreens is exploring the possibility of selling itself to a private equity firm, which could potentially offer a premium to its current valuation. Nevertheless, investors should not expect any substantial gains, considering the company's present challenges.
In conclusion, this well-known entity might be better off being discarded than considered for investment.
Walgreens' decline was partly due to its expensive expansion into care services, which burdened its balance sheet and resulted in a decreased profit margin. To address its issues, the company is now focusing on cost-cutting measures, including closing underperforming stores.
The stock's current 11% dividend yield and relatively low forward P/E ratio of 6 make it an attractive proposition for investors. However, investors should be cautious about the dividend, as it is a significant portion of the company's projected earnings for 2025 and management has not committed to maintaining the payout.